The timing of Fed tapering of QE and the outcome of the budget and debt ceiling talks in Congress. Notwithstanding the blurred picture caused by the policy situation, we have kept our EUR/USD profile unchanged, and continue to see Fed tapering marking the start of a USD uptrend that could continue throughout 2014. This is conditional on a scale-back in QE being announced later this year but we stress that the likelihood of this being (further) delayed beyond the new year has increased with the uncertain US fiscal situation. In the near term, we still see potential for EUR/USD to overshoot driven by markets pushing Fed expectations out in time, ECB inaction and peripherals' spread compression continuing. Thus, EUR/USD could hit 1.37 on a 1M horizon.
The combination of the money market scaling back the timing of the first rate hike, euro strength, a peak in the UK surprise index and higher EONIA rates means that we now estimate that the low in EUR/GBP was probably seen at the beginning of October and we forecast a stable EUR/GBP over the next 3-6M. On a 12M horizon, the GBP will still be exposed to the most dovish G4 central bank after the Bank of Japan though. Hence, we forecast that EUR/GBP will slowly move higher once again in 2014 and that GBP will stay in fundamentally 'undervalued' territory in 2014. We have lifted our 12M EUR/GBP forecast to 0.86 (was 0.84).
We have revised lower our Scandi FX forecasts as the data flow has weakened the case for rate hikes. While the fundamental backdrop remains constructive for both NOK and SEK, poor liquidity and EUR strength mean we have lifted our forecast profiles vis à vis the single currency somewhat. We still expect EUR/NOK to edge slightly lower as a rate cut is still unlikely and as the market is expected to continue pricing in a rate hike in 2014. However, Norges Bank has clearly convinced the market that a significant NOK appreciation will not be tolerated and the latest growth indicators have been weaker than expected. Therefore, we have raised the forecast profile for EUR/NOK to 8.00 (from 7.70) in 3M, 7.90 (from 7.60) in 6M and 7.80 (from 7.55) in 12M . Similarly, while the fundamental backdrop remains constructive for the SEK, the case for outperformance in the near term based on relative yields has weakened somewhat. As a result, we have raised our forecast profile for EUR/SEK marginally, to 8.60 (from 8.50) in 3M, 8.50 (from 8.40) in 6M and 8.40 (from 8.30) in 12M.
We have kept our JPY and CHF projections largely unchanged this time.
The postponement of USD strength as a result of delayed tapering of QE implies that carry currencies could see a temporary revival. Consequently, we have lifted our AUD/USD and NZD/USD forecasts somewhat as their central banks have recently invoked a less aggressive stance regarding the strength of their currencies: RBA is on hold after extensive easing over the past two years, while RBNZ has said rate hikes are likely in 2014. We now see AUD/USD at 0.93 (previously 0.90) and NZD/USD 0.83 (previously 0.79) in 3M and have become a little less downbeat on a 12M horizon.
As some stability has returned to emerging markets (EM) recently, most EM currencies have gained on the back of improved risk sentiment and we now see some signs of economic stabilisation in a range of EM countries. This is most notable in the CEE countries where the macroeconomic improvements are reflected in the more positive outlook for these currencies. However, this is mostly in the short to medium term. On a longer term horizon, we remain relatively bearish as we believe the economic recovery will be very moderate and local central banks will keep the level of interest rates low for long. We have become more positive on the Polish zloty and the Hungarian forint, mostly on a 3-6M horizon, while we remain bearish on the Czech koruna on all time horizons, as the elevated risk of deflation could still push the central bank to start direct FX intervention to ease monetary conditions further.
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