Major Currency Pairs Forecast – Danske Bank
Research Team at Danske Bank, lists down the near-term forex forecast for the major currency pairs.
Key Quotes
“EUR/USD: With no obvious direction for the cross from relative rates as the Fed is sidelined and the ECB has withdrawn from the currency war, the key driver for the cross from here should be upside from a stretched valuation. This said, in 1-3M we look for range-trading in the 1.10-1.14 interval with a key downside risk being that of a Brexit. However, this is not our base. In our main scenario, EUR/USD will rise in 6-12M despite some upside in US rates further out as EUR-positive fundamentals dominate. We are rolling our forecasts, now looking for 1.14 (previously 1.10) in 6M and 1.18 (previously 1.16) in 12M and stress that it will take a combination of Brexit fears and a marked repricing of the Fed in a more hawkish direction to send the cross below 1.10 near term.
EUR/GBP: Given the high uncertainty surrounding the EU referendum, we see risks skewed on the upside for EUR/GBP ahead of 23 June. We raise our 1M and 3M forecast to 0.79 (from 0.78) and maintain 3M at 0.80 and think EUR/GBP may inch even higher ahead of the referendum day. Longer term, the outlook for EUR/GBP very much depends on the outcome of the EU referendum. In our main scenario, we assume a status quo for the UK. This implies that GBP should appreciate immediately after the referendum. We continue to target EUR/GBP at 0.74 in 6M and 0.73 in 12M but stress that these forecasts are subject to significant digital risk.
USD/JPY: We now expect the Bank of Japan (BoJ) to cut interest by 20bp on 28 April (previously we called for a cut in July). However, the effect on the currency might be limited in the short run as the BoJ is currently fighting gravity as fundamental factors, flows and stretched valuations provide substantial support for the yen at the moment. We forecast USD/JPY at 112 in 1M (previously 116) and 115 in 3M (previously 117). Over the medium-term horizon, we expect the BoJ to cut interest rates further catching up on negative interest relative to European central banks and we still think that cyclical divergence and relative monetary policy support the case for a higher USD/JPY. We now forecast USD/JPY at 118 in 6-12M (120).
USD/CNY: China has managed to calm down the markets and dampened capital outflows faster than we expected. While we still look for a trend of weakening versus the USD on diverging monetary policy, we now look for a more gradual path. We have cut our 12M USD/CNY forecast to 6.85 from 7.00.
AUD/USD: The stabilisation in global risk appetite and the latest surge in iron ore prices have sent the cross markedly higher. The move seems overdone according to our models and challenges the economy’s transition phase. We now expect a 25bp reduction in the RBA’s cash rate target in H2. Also, we still expect higher US rates to weigh on the cross over the coming year. In light of the latest move, we revise our forecasts higher but maintain the same profile. We forecast AUD/USD at 0.74 in 1M (from 0.70), 0.73 in 3M (from 0.69), 0.71 in 6M (from 0.68) and 0.71 in 12M (from 0.68).”
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