Focus FX - Exchange rate forecast (March)

Results of parliamentary elections from Sunday show USL alliance secured a clear majority, around 60% of votes (more than recent polls indicated) which is likely to translate into a larger proportion of seats in Parliament

EUR/RON: 4.536 - 4.65 (March)


We do not rule out a scenario in which they gain constitutional majority – two-thirds of seats in Parliament. We do not rule out a scenario in which they gain constitutional majority – two-thirds of seats in Parliament. The tensioned relationship between the president and USL alliance does not make the situation easier for forming the new cabinet. In the next days the President will announce the candidate to the office of Prime Minister after consultations with other parties (USL alliance will propose Ponta). Besides this, another important question remains unanswered regarding future economic policies (four-year program of USL is aimed at stimulating demand and poses some risks to fiscal consolidation). We believe both issues could be consistent with softening pressures on the RON, especially as IMF/EC negotiations on next year’s budget draft could prove difficult.


EUR/HUF: 282.4 - 300 (March)


The final GDP data for Q3 2012 (-1.5% yoy; -0.2% qoq) confirmed that therecession continues. In particular, the weak agricultural sector in 2012 weighedon economic development. We expect little economic improvement in 2013. Theeconomic policies of the government underpin this assumption. Recently, it wasannounced there will be gas and electricity price cuts of 10% for householdsstarting from 1 January 2013. While the technical details are not available, thecosts for this will most likely be passed on to the respective companies. With electionsdue in 2014, such measures are likely to continue; this in turn will continueto weigh negatively, and not only on investments. This scenario – together withfalling interest rates – should lead to depreciation of the forint at some point. Wetherefore remain cautious on EUR/HUF and expect depreciation towards levelsof 300 as the most likely outcome in the next months.


EUR/USD: 1.297 - 1.30 (March)


Several traders on the foreign exchange market were obviously caught by surprise last week by the ECB. The surprisingly strong negative revisions of economic and inflation forecasts only added to the speculation of a possible further reduction in interest rates. The statements from ECB President Draghi that the council on monetary policy even discussed a potential reduction during last Thursday’s meeting only helped to fan the fires even further. Following the rate setting meetings in October and November, the opinion largely prevalent on markets in recent weeks was that there will be no further reductions anytime soon, but now things are looking different. This surprise affected the euro against the US dollar as it lost two cents and slid to approximately 1.29 EUR/USD. Leading up to tomorrow’s decision from the Fed regarding interest rates, the shared currency has managed to regain some ground. We feel it is very possible that the Fed will expand their latest bond purchase program and this will certainly pull the dollar down and swiftly bring the EUR/USD rate back to 1.30.


EUR/CHF: 1.211 - 1.20 (March)


Market reactions over the resignation of Italian Prime Minster Monti are also visible in Switzerland. Yields slid and the Swiss franc once again began to move towards the intervention limit of EUR/CHF 1.20 before it jumped back to 1.21. The weekly published sight deposits that all banks maintain at the Swiss National Bank (SNB) provide no hints that special money market activities will take place following the announcement last week from several banks that they will charge negative interest rates if a certain limit is reached. Demand deposits at the SNB fell slightly by CHF 733 mn to CHF 372.6 bn. In this context, this week’s quarterly monetary policy meeting will certainly be interesting. In our opinion, we do not feel it is likely that the monetary policy course currently laid in will change at all as there is absolutely no reason to do so. The inflation rate once again fell against expectations in November by -0.4% yoy (-0.3% mom). The CHF upper bound will therefore continue to remain intact for some time to come.


EUR/JPY*: 107.0 - 104 (March)


Elections will finally take place this weekend in Japan. As before, the LDP (Liberal Democratic Party) remains ahead and there are even hopes for a strong parliamentary majority. Therefore, a change in monetary policy strategy (expansive measures) is now in the center of the debate. Regardless of the election result, the Bank of Japan will still have its meeting next week: an expansion of the asset purchase program (currently at JPY 92 tr) of about JPY 5-10 tr is expected. The effect of measures thus far is more than meek. In all likelihood, Japan will also see negative economic growth in the first quarter of this year. USD/JPY and two-year yield differences between USA and Japan continue to diverge. Obviously the lack of political stability is a destabilizing variable. It is possible that this particular needle will be threaded and if the expansive monetary policy is actually implemented, yields in Japan will certainly remain very low and the yield difference with the USA will certainly widen in the course of the year. All of these events would serve only to further devalue the yen. In an annual outlook, the yen should therefore continue to weaken against the euro.


EUR/GBP: 0.806 - 0.80 (March)


Depending on what is on the news in the Eurozone, the EUR/GBP continues to move towards 0.80. Currently the risk switch is only halfway flipped. As 2013 goes on and the economic low is surpassed, the factors that move the GBP will likely be largely domestic. The monetary policy will remain unchanged following the latest MPC, despite the fact that Prime Minister Cameron has sketched a rather depressing economic picture for the coming years and announced that the goal to begin reducing the sovereign debt in % of GDP will only be reached in 2018. According to Fitch, the credibility of the country is therefore damaged; the agency indicated that a downgrade is possible. Should disturbances in the Eurozone remain at a minimum, the GBP should tend weaker in the coming months. Apart from a visible weakness in the euro, a significant recovery in the economy could strengthen the GBP again.




EUR/PLN: 4.097 - 4.15 (March)


As there are no supporting factors for EUR/PLN from the domestic market, EUR/PLN suffered somewhat from the resurgent uncertainties in the Eurozone and was thus briefly trading above the 4.12 level. This week’s economic data should confirm the ongoing slowdown in the Polish economy and the resulting deceleration in CPI inflation (most likely below 3% yoy). These expected developments were already well reflected in the 25bprate cut last week. Recent comments  from MPC members suggest that a rate cut in January seems to be a done deal as well. The market seems to be pricing in a 50bp rate cut in January (as it did for the last MPC meeting). However, these expectations might be dashed yet again, which add to a certain downside for EU/PLN in times of lighter trading volumes by the end of the year.


EUR/CZK: 25.24 - 25.10 (March)


The final Q3 GDP data saw a minorrevision from the original -1.5% yoyto -1.3% yoy. Quarter-on-quarter datawas unchanged at -0.3%, and theCzech economy remains in a recession.Weaker-than-expected trade balancefigures for October underpinned the weak economic development,even though the industrial productionfigure for October was a tad stronger(4.1% yoy) than consensus expected.

All in all, we continue to project thateconomic development is likely to remainweak in 2013, whilst we expectmoderate improvement, especially inH2 2013. CPI data from Novembercame in below expectations at 2.7%yoy, and together with the weak economythis keeps all eyes on a possiblereaction by the central bank. Giventhe low interest rate of 0.05% thecentral bank continues to use verbalintervention as a tool and is likely tostick to this strategy. Therefore, we donot expect any lasting appreciationtrend in the coming months, but rathera volatile sideways movement.


EUR/HRK: 7.515 - 7.55 (March)


On the domestic FX market, the weekwas marked by slight appreciationpressures on HRK versus EUR. Startingfrom the EUR/HRK 7.540 level, theexchange rate was pushed down tobelow 7.520, mainly driven by the expectedforeign currency inflows fromloans to public companies. By theend of the week, however, the FX ratestabilised slightly above 7.520, andwe do not expect further strengthening.

At the same time, trading shouldbe volatile in a projected range of7.510 to 7.550, depending on the issuedamount of EUR-linked T-bills andfinalisation of loans to public companies.

The amounts of EUR-linked T-billsfalling due will be the main driversof the local FX market for the rest ofthe year, while external deleveragingby the corporate sector and theusual increase in merchandise importsin December should also affect thekuna. Although occasional appreciationpressures on HRK are possible,depreciation pressures are expectedto prevail.


EUR/RUB: 39.77 - 41.0 (March), USD/RUB: 30.75 - 31.5 (March)


In the previous days, the rouble onceagain made gains below the 35 limitagainst the currency basket that iscomprised of 55% US dollar and 45%euro. Thus, it seems that the currencyhas decoupled itself from movementsin oil prices, which dropped last weekand since have moved rather sideways.

Another reason for a strongerrouble could be found in the monetarypolicy of the central bank, which leftthe key rate unchanged on Monday,an action seen by market participantsas tending to be positive in light of aweakening economy. Two months agoin September, the central bank raisedinterest rates and a surprisingly low interestrate in November (0.3% mom)prevented another increase in theannual inflation rate (latest at 6.5%yoy). One, however, should not expecttoo much loosening in monetarypolicy as inflation for H1 2013 willlikely be above the inflation goal of5-6% yoy. The key rate should remainstable in the coming months and therouble should remain strong below the35 mark against the basket in the firstquarter of 2013 in the event of strongportfolio inflows.


EUR/UAH: 10.498 - 10.9 (March), USD/UAH: 8.100 - 8.4 (March)


President Yanukovych decided tonominate the current Prime MinisterAzarov for another term in office.Thus, the President seems to be bettingon a sure thing; previously therewere speculations that he would nominatethe head of the central bank, Arbusov,a man who is said to be closeto the family of the President. The firstimportant task facing the new and oldprime minister will be to negotiatea new deal with the IMF starting inJanuary. Things could be difficult asAzarov protested vehemently againstdemands from the IMF (especially regardingincreased energy prices forhouseholds) in the past. Furthermore, data from the central bank show furthersinking in currency reserves ofaround USD 1.5 bn to USD 25.4 bnin November; FX interventions and netcash demand were at similar levels.

After lowering our outlook for the endof the year from USD/UAH 8.80 to8.30-8.40, we feel that in the lightof administrative measures on thecurrency market and our expectationof an IMF program in H1 2013, theUAH will slide to USD/UAH 9 by theend of 2013. The amount of uncertaintyin the exchange rate will remainquite high given the difficult economicsituation in Ukraine.


EUR/CNY: 8.100 - 8.11 (March), USD/CNY: 6.246 - 6.24 (March)


While November’s numbers for industrialmanufacturing and retail bothprovided positive surprises (+10.1%yoy and +14.9% yoy, respectively),growth in tangible assets remainedat last month’s level (+20.7% yoy). Trading data was very disappointing,though. Despite the consensus estimateof +9% yoy exports came in atonly +2.9% yoy and imports showedabsolutely no growth on an annual basis.Exports have weakened so drasticallydue to renewed drop in demandin Europe (-18% yoy), USA (-2.6%yoy) and Japan (-3.8% yoy), whileASEAN and other emerging marketswere unable to balance out this largedeficit as in previous months.

The export data also showed itselfin CNY trading. After the renminbiscratched the upper bound againstthe USD last month on an almost dailybasis, this week the Chinese currencylost value and is currently at 6.25. ThePeople’s Bank of China is holding totheir reference rate of 6.29.Furthermore, the “Central EconomicWork Conference” must be held thisweek and there the economic policydirection for 2013 will be decidedupon. Large surprises are, however,not expected.