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ING - FX Talking

ING - FX Talking

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Published by Ciocoiu Vlad Andrei

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Published by: Ciocoiu Vlad Andrei on May 20, 2012
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05/29/2012

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May 2012
 
FINANCIAL MARKETS RESEARCH
 
FX talkING
ING’s view on the major bullish and bearishcurrency themes
FX
16 May 2012
It is hard to avoid the conclusion that the Eurozone needs a weaker EUR. Andno longer canthe US and the UK enjoy the soft currency levels seen over recent years. Emerging market FX looks set to suffer a wild ride ahead of Greek elections on 17 June, but could find support should the ECB cut in 3Q.
ING FX forecastsUSD/Majors (4 Jan 08=100)
research.ing.com
SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION
EUR/USD USD/JPY EUR/GBP
608010012014016008091011126080100120140160JPYEURGBPStronger USD
1M 1.24 80 0.79
3M 1.18 81
0.76
6M 1.15 84
0.75
12M 1.20 90
0.77
EUR/SEK AUD/USD EUR/CZK
1M 9.40 0.97 26.0
3M 9.50 0.94
26.3
6M 9.50 0.92
25.5
12M 9.30 0.90
24.9
Source: Reuters, ING
USD/TRY USD/BRL USD/CNY
1M 1.85
2.05
6.29
EUR/CE4 ( 4 Jan 08100)
3M 1.86 1.95
6.28
80100120140160180080910111280100120140160180$/TRY$/BRL$/CNY/PLNStronger EM FX
6M 1.85 1.85
6.26
12M 1.76 1.80
6.21
Source: ING
FX performance
EUR/USDUSD/JPYGBP/USDEUR/NOKNZD/USDUSD/CAD
%MoM -2.9-0.7-0.10.6 -6.41.1%YoY -10.4-1.2-1.7-3.4 -2.73.7
EUR/HUFEUR/CZKUSD/RUBUSD/BRLUSD/KRWUSD/CNY
Source: Reuters, ING
%MoM -0.72.84.57.7 2.70.2%YoY 10.14.310.023.0 7.4-2.8
Source: Reuters, ING
FX Strategy
Chris Turner 
Head of Foreign Exchange StrategyLondon +44 20 7767 1610chris.turner@uk.ing.com
Tom Levinson
Foreign Exchange StrategyLondon +44 20 7767 8057tom.levinson@uk.ing.com View all our research on Bloomberg atING5<GO>
1
 
FX talkING May 2012
Developed markets
EUR/USD
Most roads lead to a weaker EUR Current spot: 1.27
 
Greek elections proved the catalyst to break EUR/USD out of its1.30-35 trading range. The splintering of Greek public opinion andthe failure to form a government means that Greece returns to thepolls on 17 June.At present, there is no sign that these electionswill deliver any cleaner an outcome. Indeed, these elections will bepitched as a referendum on EMU membership – leaving EUR/USDvulnerable to the vagaries of opinion polls over the next month.
1.101.201.301.401.501.60Jan08 Jan09 Jan10 Jan11 Jan12 Jan131.101.201.301.401.501.60
 
Even if a pro-Euro coalition wins in June, it looks as though the bail-out deal with the EU/ECB/IMF will need to be renegotiated –addingto more strains in peripheral debt markets.
ING f'castMkt Fwds
 
Increasingly it seems the only lever for growth in the Eurozone is aweaker EUR. And we expect the ECB to deliver this with a ratecut/LTRO3 this summer. We now see EUR/USD falling to 1.15.
Source: Reuters, ING
ING forecasts
(mkt fwd)
1M
1.24 (1.274)
3M
1.18 (1.275)
6M
1.15 (1.277)
12M
1.20 (1.282)
Chris Turner, London +44 20 7767 1610
USD/JPY
Holding onto a bullish view Current spot: 80.5
708090100Jan08 Jan09 Jan10 Jan11 Jan12 Jan13708090100
 
110 110ING f'castMkt Fwds
Source: Reuters, ING
 
We doubt speculation over additional stimulus from the Fed willresult in a round of QE3 at the 20 June FOMC meeting. If anything US activity data should improve into that meetingfollowing a 15% fall in oil prices. The main risk to the US economyarrives at year-end. Should a new Congress fail to negotiate anew debt deal, such that US$1.2trn of fiscal tightening kicks in,the US could be looking at zero growth in 2013 rather than 2-3%.
 
In all, however, we believe the USD is embarking on a multi-quarter rally. In Japan, the focus remains on growth and battlingdeflation. April saw the BoJ increase its JGB buying operation byJPY10tr. Expect the BoJ to remain under pressure to do more,while the government debates necessary fiscal tightening.
 
Unilateral FX intervention is possible were USD/JPY to break 79.
ING forecasts
(mkt fwd)
1M
80 (80.44)
3M
81 (80.38)
6M
84 (80.25)
12M
90 (79.85)
Chris Turner, London +44 20 7767 1610
GBP/USD
Caught in the cross-fire Current spot: 1.59
1.301.501.70Jan08 Jan09 Jan10 Jan11 Jan12 Jan131.301.501.701.902.101.902.10ING f'castMkt Fwds
 
Source: Reuters, ING
 
GBP TWI has rallied 3.5% this year. Helping GBP has been theview that early fiscal tightening (in 2010) helped secure GBP’sposition as a safe-haven currency. Indeed the CDS market istelling us the UK is a better credit than Germany. With the EURunder pressure, GBP’s popularity as a reserve currency hasincreased –with the Swiss National Bank seemingly doubling theweight of GBP in its FX reserves to 8%.
 
Even though the BoE would like GBP to stay weak and help re-balance the economy, the reality is that most developed worldeconomies require weaker currencies. In 2009-11, GBP TWI was15-20% weaker than its long-term average. Effectively other currencies, notably EUR, are now playing catch-up.
 
Overall USD strength should trump GBP near-term, risking 1.53.
ING forecasts
(mkt fwd)
1M
1.57 (1.593)
3M
1.55 (1.592)
6M
1.53 (1.591)
12M
1.56 (1.589)
Chris Turner, London +44 20 7767 16102
 
FX talkING May 2012
EUR/JPY
Some sizable downside in store Current spot: 102.5
7595115135155175Jan08 Jan09 Jan10 Jan11 Jan12 Jan137595115135155175ING f'castMkt Fwds
 
Source: Reuters, ING
 
The EUR negatives are clear. Last year’s sovereign debt crisisand subsequent credit crunch means that the Eurozone willcontract 0.4% this year. And the future stability of the EUR is nowin the hands of the Greek voters. Either Greece departs, or theECB is forced to smooth the necessary competitive adjustment insouthern Europe – both paths lead to a weaker EUR.
 
Supporting the JPY in the new Japanese fiscal year has beenrepatriation of overseas investments by Japanese investors. Wehad not expected this. However, Japanese politicians now havetheir sights firmly set on USD/JPY and should force more actionfrom the BoJ were USD/JPY to be looking fragile below 80.
 
Independent EUR weakness can take EUR/JPY to 95 this year,although it should hold above the 2000 low of 89.
ING forecasts
(mkt fwd)
1M
99.2 (102.5)
3M
95.6 (102.5)
6M
96.6 (102.5)
12M
108.0 (102.4)
Chris Turner, London +44 20 7767 1610
EUR/GBP
Finally the long-awaited break-out has come Current spot: 0.80
 
0.700.750.800.850.900.951.00Jan08 Jan09 Jan10 Jan11 Jan12 Jan130.700.750.800.850.900.951.00ING f'castMkt Fwds
Source: Reuters, ING
 
The Greek crisis finally triggered the break-out. Effectively we arelooking for a re-rating of both GBP and the USD against the EURthis year – meaning that EUR/GBP can trade down to 0.75.
 
UK data is probably not as bad as the official figures suggest. TheBoE admits it takes more notice of the survey data than the officialGDP statistics. In any case we look for 1Q GDP of -0.2% QoQ tobe revised higher on 24 May. A slight risk to GBP comes from theBoE minutes released 23May. The May inflation report showedthat CPI could be 1.6% YoY two years’ ahead, below the 2%target, unless the BoE employs more stimulus. The minutes couldshow 3 (from 1) of the 9 MPC members voting for more QE.
 
With uncertainty rising this summer and investors shifting to thepreference of safety from return, GBP should continue to benefit.
ING forecasts
(mkt fwd)
1M
0.79 (0.800)
3M
0.76 (0.801)
6M
0.75 (0.802)
12M
0.77 (0.806)
Chris Turner, London +44 20 7767 1610
EUR/CHF
Under fire Current spot: 1.20
1.001.101.201.301.401.501.601.70Jan08 Jan09 Jan10 Jan11 Jan12 Jan131.001.101.201.301.401.501.601.70ING f'castMkt Fwds
 
Source: Reuters, ING
 
The Eurozone crisis is once again weighing heavily on EUR/CHF.Last year we wrote that the pressure derived from a) foreignerspouring into short-term Swiss securities to flee the EUR and moreimportantly and b) Swiss investors failing to re-cycle large CHFtrade inflows by buying foreign bonds. The SNB had to step intothat BoP void last year and will probably be doing again so now.
 
So monthly FX reserve data from the SNB will become important,as will, of course the 14 June quarterly SNB meeting. 1QGDPdata (released 31May) will probably not give grounds to the SNBto turn more dovish, but leading indicators are warning of a moreaggressive downturn in 2Q12 – most notably the PMI data.
 
We believe 1.20 holds. The SNB have entered this arrangement‘eyes wide open’. Rising FX reserves should not be a problem.
ING forecasts
(mkt fwd)
1M
1.20 (1.201)
3M
1.20 (1.200)
6M
1.20 (1.200)
12M
1.20 (1.198)
Chris Turner, London +44 20 7767 16103

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