FX Forexcast Update: USD Weakness to Continue
Main forecast changes
This month we have made very few changes. We have decided to keep our EUR/USD forecast profile unchanged at 1.35 (3M), 1.35 (6M) and 1.30 (12M). We continue to expect the Fed to be successful in changing market expectations and expect investors to continue to add USD-funded carry positions on the currency market. This should trigger further USD weakness and not least against the strongest high yielders. It would be naive, however, not to expect bumps on the way. Surely there will come periods of rising euro concerns and it also remains premature to dismiss further ECB easing. A deposit rate cut would clearly be euro negative but when evaluating the risks to EUR/USD from relative monetary policy it should be clear that it will be near impossible for the ECB to match the open-ended commitment made by the Fed.
We also continue to expect a weaker GBP. The UK economy is still relatively weak and the correlation between EUR/GBP and EUR/USD is still high. Hence, we forecast that EUR/GBP will rise to 0.82 (0.85) and 0.84 (0.85) on a three- and six-month horizon. However, we have pencilled in a slightly less aggressive profile for EUR/GBP given that the UK economy has after all developed slightly better than feared. We continue to see EUR/GBP falling on a 12M horizon in line with EUR/USD.
We have made few changes to our Scandi forecasts, We continue to expect both EUR/NOK and EUR/SEK to fall from the current level on a three- and six-month horizon. However, note that we expect EUR/SEK to spike to 8.80 on a 1M horizon, as we expect the Riksbank to cut rates on 25 October. The daily purchase of foreign currency by Norges Bank in November is a short-term risk for the NOK that could potentially push EUR/NOK higher temporarily. EUR/DKK is expected to trade just below central parity at 7.46038 for the next six months.
We continue to expect USD/JPY and EUR/CHF to move higher over the next three to six months, as demand for safe-haven currencies should abate and, in particular, the Bank of Japan is expected to stay on an aggressive easing path. We expect USD/JPY to reach 80 (81) and 82 (82) on a three- and six-month horizon. We expect EUR/CHF to rise to 1.23 (1.24) on a 3-month horizon as safe-haven flows into Switzerland fall further.
We have left our forecasts for USD/NZD and USD/CAD unchanged but have revised our forecast for AUD/USD somewhat lower on a 3M horizon to 1.06 (1.08) reflecting weaker Chinese growth and aggressive pricing of RBA.
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