ECB Deposit Cut To Weigh On EUR In 2014

We have kept our the EUR/USD forecasts unchanged. But, compared with previously, our outlook for a weaker EUR/USD in 2014 now has more two-sided legs: we look for a steeper US money market curve to push the USD higher and for an ECB which is decidedly on an easing bias to firmly anchor the short end of the euro curve thus weighing on EUR. We still target the cross at 1.26 in 12M and see potential for a clear move lower in Q1 towards 1.32.

We still look for a weaker yen against the dollar due to a continuous divergent monetary policy between the Fed and BoJ. We have 'rolled' our the USD/JPY forecast and we now expect the USD/JPY at 108 (105) on a six-month horizon. We continue to see the USD/JPY at 110 on a 12-month horizon.

On the commodity currencies we have notably incorporated more downside in both the AUD and CAD: with Fed set for tapering soon (December) and both the RBA and the BoC happy to accommodate more weakness in their currencies to stimulate domestic growth and fight disinflation and with commodities set for price downside next year, both the Loonie and especially the Aussie will be in for a hard time still.

We have maintained our view that both the SEK and NOK will appreciate against the EUR in 2014. However, we highlight the risk of a further Scandi sell-off over the next couple of weeks. We expect the Riksbank to cut rates on 17 December and liquidity is often poor in the Scandinavian currency market in December. The latter could hurt the NOK in particular. We have 1M forecasts for the EUR/NOK and EUR/SEK of 8.60 and 9.20, respectively. We forecast that the EUR/NOK and EUR/SEK will fall to 8.00 and 8.50, respectively, during the course of 2014.

We have not made any major forecast changes for the Central and Eastern European currencies. For the PLN, HUF and CZK, we continue to see near-term weakness on the back of weak growth and a fairly strong disinflationary process, which likely will spark further monetary easing in the CEE3 countries. Long term we remain fairly bearish on both the CZK and PLN, while we believe strong external balances will be supportive of the HUF.

To Read the Entire Report Please Click on the pdf File Below.