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  • FX Talking January 2021

    1

    FX Talking Painting in broad brush strokes

    Early FX trading in 2021 has seen the dollar find some support from higher US yields. 2021 should not be the year to pencil in small corrections, but more to paint with broad brush strokes the major trends set to dominate the year. This includes a global recovery which emerges from 2Q onwards, central banks slow to withdraw stimulus and a broadly weaker dollar.

    For EUR/USD we could well see consolidation in a 1.20-1.25 range through 1Q21. As more convincing signs of recovery emerge, especially in Europe this summer, we look for EUR/USD to push on towards the 1.30 area by year-end. In effect we are looking at a more modest repeat of the 2003-2006 period, when a global recovery drove commodity prices higher and the dollar weaker – and the ECB had to suffer a stronger EUR/$.

    Elsewhere in Europe we continue to favour those currencies exposed to the global recovery cycle (especially NOK, SEK) as well as though potentially benefiting from some early tightening – Czech koruna. Despite FX intervention to slow its advance, we also see a stronger Polish zloty as well. The RUB and TRY should stay supported this quarter.

    Elsewhere, FX reform in China means that market trends will have a greater say in Renminbi pricing. We now see USD/CNY heading down to the 6.20 area by year-end, providing a tail-wind for Asian FX. Buoyed by the commodity rally, many Latin currencies are performing well. We would still prefer to back BRL over MXN, where the latter could be undermined by a more dovish composition at Banxico and a 100bp easing cycle.

    ING FX forecasts

    EUR/USD USD/JPY GBP/USD 1M 1.22 ↑ 102 ↓ 1.39 ↑ 3M 1.22 ↑ 102 ↓ 1.39 ↑ 6M 1.25 ↑ 100 ↓ 1.42 ↑ 12M 1.30 ↑ 100 ↓ 1.48 ↑

    EUR/GBP EUR/CZK EUR/PLN 1M 0.88 ↓ 26.00 → 4.47 ↓ 3M 0.88 ↓ 25.90 ↓ 4.45 ↓ 6M 0.88 ↓ 25.80 ↓ 4.40 ↓ 12M 0.88 ↓ 25.50 ↓ 4.37 ↓

    USD/CNY USD/MXN USD/BRL 1M 6.43 ↑ 19.80 ↓ 5.20 ↓ 3M 6.38 ↓ 19.80 ↓ 5.15 ↓ 6M 6.22 ↓ 19.70 ↓ 5.10 ↓ 12M 6.18 ↓ 20.00 ↓ 5.00 ↓

    ↑ / → / ↓ indicates our forecast for the currency pair is above/in line with/below the corresponding market forward or NDF outright Source: Refinitiv, ING forecast

    FX performance

    EUR/USD USD/JPY EUR/GBP EUR/NOK NZD/USD USD/CAD %MoM 0.6 0.0 -0.7 -2.6 1.8 -0.6 %YoY 9.3 -4.4 5.8 5.1 8.2 -2.0

    USD/UAH USD/KZT USD/BRL USD/ARS USD/CNY USD/TRY %MoM -0.7 -0.6 6.5 4.5 -1.0 -4.6 %YoY 17.4 10.8 34.9 42.7 -6.7 26.0

    Source: Refinitiv, ING forecast

    Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE London +44 20 7767 1610 chris.turner@ing.com

    Petr Krpata, CFA Chief EMEA FX and IR Strategist London +44 20 7767 6561 petr.krpata@ing.com

    Francesco Pesole Foreign Exchange Strategy London +44 20 7767 6405 francesco.pesole@ing.com View all our research on Bloomberg at ING5

    USD/Majors (5 Jan 14=100)

    Source: Refinitiv, ING forecast

    USD/EM (5 Jan 14=100)

    Source: Refinitiv, ING forecast

    80 90 100 110 120 130 140 150 160

    80 90

    100 110 120 130 140 150 160

    14 15 16 17 18 19 20 21

    JPY EUR GBP

    Stronger USD

    80 120 160 200 240 280 320 360 400

    80 120 160 200 240 280 320 360 400

    14 15 16 17 18 19 20 21

    $/TRY $/BRL $/CNY $/PLN

    Stronger EM FX

    FX Strategy

    Economic & Financial Analysis

    12 January 2021

    FX

    www.ing.com/THINK

  • FX Talking January 2021

    2

    Developed markets EUR/USD 1.30 is the number Current spot: 1.215

    • We expect 2021 to see an extension of the broad and powerful dollar bear trend that emerged in late 2020. Driving that is the Fed printing $120bn per month and, combined with 2H recovery hopes, rising inflation expectations will drive US real policy rates deeper into negative territory.

    • Crucially we think the Fed is not going to stop this trend. Given the focus on more inclusive growth, it will be more minded to slow any premature rise in US yields with a more dovish message. Further yield curve steepening need not lift the dollar.

    • A synchronised global recovery, albeit on a smaller scale than 2003-2007, is dollar negative, commodity and EUR positive. This will be an uncomfortable year for the ECB as EUR/$ heads to 1.30, prompting bouts of verbal intervention along the way. Source: Refinitiv, ING forecast

    ING forecasts (mkt fwd) 1M 1.22 (1.2168) 3M 1.22 (1.2183) 6M 1.25 (1.208) 12M 1.30 (1.2263)

    Chris Turner, London +44 20 7767 1610

    USD/JPY Tokyo gets nervous over strong JPY Current spot: 104.15

    • The recent dip in USD/JPY to 102.60 has prompted Japanese policy makers (BoJ, MoF and FSA) to get together and discuss FX strategy. They clearly don’t want $/JPY to trade below 100 – wiping out profit margins for the big exporters – but in reality there is little they can do about this.

    • The US Treasury’s currency manipulator report was designed for a year such as this. i.e. balance of payments trends should be allowed to play out in FX markets, without intervention.

    • Thus if $/JPY gets anywhere near 105 on FX intervention talk, expect investors to hit the bid. Broad dollar trends and the strong adjustment in Asian FX means 100 will be pressured.

    Source: Refinitiv, ING forecast

    ING forecasts (mkt fwd) 1M 102.00 (104.11) 3M 102.00 (104.04) 6M 100.00 (103.92) 12M 100.00 (103.63)

    Chris Turner, London +44 20 7767 1610

    GBP/USD Big rise in GBP/USD ahead Current spot: 1.3492

    • With idiosyncratic risk of hard Brexit behind us, GBP/USD is set for further gains. We target 1.48 by end-2021. The gains should be primarily driven by a rising EUR/USD (target 1.30) rather than a stronger GBP.

    • The speculative GBP/USD positioning remains neutral (as per CFTC data), allowing for further GBP gains. With Brexit risk out of the way, GBP/USD implied volatility should continue declining, mainly relative to AUD and NZD vols.

    • The Scottish Parliamentary elections in May 2021 are likely to be accompanied by negative newsflow about another independence referendum, but the negative impact on GBP is to be modest given the referendum is unlikely for several years. Source: Refinitiv, ING forecast

    ING forecasts (mkt fwd) 1M 1.39 (1.3494) 3M 1.39 (1.3499) 6M 1.42 (1.3506) 12M 1.48 (1.3527)

    Petr Krpata, London +44 20 7767 6561

    Developed markets

    1.00

    1.05

    1.10

    1.15

    1.20

    1.25

    1.30

    1.35

    1.00

    1.05

    1.10

    1.15

    1.20

    1.25

    1.30

    1.35

    Jan15 Jan16 Jan17 Jan18 Jan19 Jan20 Jan21 Jan22

    ING f'cast Mkt Fwds

    1.10

    1.20

    1.30

    1.40

    1.50

    1.60

    1.70

    1.10

    1.20

    1.30

    1.40

    1.50

    1.60

    1.70

    Jan15 Jan16 Jan17 Jan18 Jan19 Jan20 Jan21 Jan22

    ING f'cast Mkt Fwds

    95

    100

    105

    110

    115

    120

    125

    130

    95

    100

    105

    110

    115

    120

    125

    130

    Jan15 Jan16 Jan17 Jan18 Jan19 Jan20 Jan21 Jan22

    ING f'cast Mkt Fwds

  • FX Talking January 2021

    3

    EUR/JPY Still favouring the EUR in a recovery year Current spot: 126.63

    • Reflation trading is still slightly favouring EUR/JPY higher – with USD/JPY more sensitive to the steeper US yield curve. A key dynamic helping EUR/JPY should also be the recycled flows into EUR from Asian FX reserve mangers. This community is still providing local currency liquidity to the market (buying USD) and will then convert 20-30% into EUR. JPY share in FX reserves

  • FX Talking January 2021

    4

    EUR/NOK After strong January, the pace of NOK strength is to slow Current spot: 10.35

    • Seasonally, January is the strongest month for NOK and reflects the current krone outperformance. We expect the pace of NOK gains to slow from February onwards, but EUR/NOK should continue to dip lower, helped by the supportive external environment.

    • With NOK’s high beta to risk and further gradual upside to the oil price this year, EUR/NOK is to move below 10.00 this year.

    • Norges Bank should offer an additional helping hand to NOK and start signalling earlier rate hikes from the mid-year onwards. NB is likely to be the first G10 central bank to hike interest rates. Albeit this will be a 2022 story, the expectations of the tightening should benefit NOK later this year. Source: Refinitiv, ING forecast

    ING forecasts (mkt fwd) 1M 10.20 (10.36) 3M 10.20 (10.38) 6M 10.10 (10.40) 12M 9.90 (10.46)

    Petr Krpata, London +44 20 7767 6561

    EUR/SEK More gains ahead Current spot: 10.06

    • The SEK outlook continues to look bright. Despite the rising Covid cases globally, the market is focused on the post winter rebound which should benefit currencies of small open economies levered to global growth such as SEK.

    • The Riksbank increased QE in November but this (a) was not large enough to outweigh the positive impact of the external environment (b) was mirrored by the ECB later in December. With the bar for Riksbank negative rates set high, further gains in SEK lie ahead.

    • The bulk of the SEK under-v

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