FX Forecast: Dollar, Yen And Sterling In 2013

This month we would like to highlight our one-month forecasts that can be found on pages 28-31. In general we expect the current weak risk picture tocontinue throughout December. The combination of fiscal cliff concerns, scaling back on risk-positions ahead of year-end, continued uncertainty whether Spain will ask for ECB support does not bode well for risk appetite over the next six weeks. Therefore, we forecast that EUR/USD will drop to 1.26 on a one-month horizon, that EUR/NOK and EUR/SEK will tend to move higher ahead of year-end (one-month targets, EUR/SEK 8.75 and EUR/NOK 7.40) and that commodity, cyclical and EM currencies will face further headwind ahead of year-end.

Current risk-off environment is expected to be temporary and we still look for 2013 to provide an improvement in risk appetite. The U.S. numbers have improved, there are signs that the recovery has gained momentum in Asia and the Fed - through its open-ended easing -- is adding cheap dollar liquidity the market. The latter combined with an expected low-volatility environment bodes very well for carry strategies in 2013. Hence, in 2013 we forecast a weaker dollar, a weaker yen and a weaker sterling. Commodity currencies, the Scandies and EM currencies are on the other hand forecasted to strengthen, not least during the first six months of 2013.

The ECB has reduced tail-risks in Europe and the Fed has secured a historic easing commitment in the U.S. Relative monetary policy is now clearly favouring EUR/USD upside. Relative growth is favouring the dollar, however, and should continue to reduce the impact from relative monetary policy. The U.S. fiscal cliff is dollar positive short term, which is reflected in our one-month forecast for EUR/USD at 1.26, but going into 2013 we expect renewed upside in EUR/USD. We have revised our three and six-month EUR/USD forecast to 1.30 (1.35), 1.33 (1.35) respectively, while keeping our twelve-month forecast unchanged at 1.30. The revisions primarily reflect a better growth outlook for the U.S. relative to the euro zone.

We expect the upcoming election in Japan and a rising risk of recession to lead to increased pressure on Bank of Japan to ease monetary policy further. We are now even more negative on JPY and have moved forward our expectation of further JPY weakness. We now target USD/JPY at 81 (79) in one month, 83 (80) in 3M, 84 (82) in six months and 85 (83) in 12 months.

For the commodity currencies we expect fiscal woes to prove a headwind vis-à-vis USD ahead of New Year but the improvement in the cyclical environment that we look for should prove a positive early 2013 together with healthy risk appetite fuelled by central bank easing. However, beyond the six-month horizon a challenging environment with focus on low growth for long, questioning of the Chinesegrowth potential and weaker commodity prices should weigh.

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