FX Forecast Update: PIIGS Unlikely to Reverse the Dollar Downtrend
While European debt woes are weighing on the euro in the short term, we expect EUR/USD to continue 2011 higher in 2011. The divergence between monetary policies in the US and Europe is the most important factor. Low US interest rates are fuelling demand for stocks and commodities, which usually coincides with higher EUR/USD levels.
Loose US monetary policy should keep US rates low, in turn weighing on USD/JPY.
Harsh austerity measures and the BoE getting softer in 2011 will push the sterling weaker alongside the US dollar. We believe the markets will revise UK prospects lower throughout the year.
We maintain our positive views on the Scandies and forecast lower levels in both EUR/SEK and EUR/NOK over the coming quarters. However, risk-reward has been better and positioning is stretched ahead of year-end. Hence, both could be subject to a sell-off if risk appetite deteriorates.
Despite being massively overvalued, we believe the AUD, CAD and NZD will go stronger against the US dollar. Higher rates and higher commodity prices are the most important drivers.
We see EUR/CHF trading at the lower end of its 1.30-1.40 range in the next quarters before heading higher. The SNB is likely to hike before the ECB.
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