FX Forecast 22 May 2013

Tom Tong22/May/2013Currency Updates


No change in forecasts or view.

Q213 1.24
Q313 1.20
Q413 1.15
Q114 1.13

E2014 1.12


We revise our short and medium term forecasts for Sterling slightly higher against the Euro and the dollar.

First-quarter GDP growth published April 25th which contained a rare pleasant surprise. This and other better than expected numbers have led the Bank of England to upgrade slightly its expected growth profile in the May Inflation Report.

Further, the Minutes of the Monetary Policy Committee May meeting appear to show a slightly less dovish tilt. The majority of six members that is voting against further expansion of the QE target appears to be increasingly sceptical that any benefits will be derived from additional Gilt purchases. Therefore, the delicate 6-3 balance against additional QE in the Monetary Policy Committee of the Bank of England is unlikely to shift further in favor of expanding the Gilt purchase target. We now expect no change in policy until August.

We now expect a slightly faster rate of appreciation of Sterling against the Euro, and slightly slower depreciation against the US dollar.

Q213 0.82
Q313 0.79
Q413 0.78

Q114 0.77
E2014 0.76


No change in forecasts or view.

Q213 1.20
Q313 1.20
Q413 1.20
Q114 1.20

E2014 1.20


No change in forecasts or view.

Q213 8.40
Q313 8.30
Q413 8.15
Q114 8.10

E2014 8.00


We revise our short and medium term forecasts for JPY lower against all major currencies.

The aggressive reflationary stand announced by the Bank of Japan in early April appears to be working as intended. The Yen appears on track to reach our target of 105 to the dollar by the end of this quarter. We note that this was one of the most aggressive predictions among forecasters at the time it was made, and has now become close to market consensus.

In addition to the currency devaluation, the new measures appear to be having the desired macroeconomic impact. First-quarter GDP came in considerably stronger than expected at 3.5% saar. Growth was buoyed by consumption, residential investment; these are the two components of domestic demand most directly targeted by Bank of Japan easing. In addition, Yen depreciation is already providing a decent boost to net exports. The only black mark was an absence of improvement in the GDP deflator.

Clearly easing measures by the Bank of Japan are having some of the desired effect, although their impact on deflation has yet to be seen. Therefore, the Bank of Japan is unlikely to lift its foot off the monetary pedal, particularly since there seems to be little or no organized oushback against Yen devaluation by Japan’s trading partners, South Korea excepted. We expect the trend towards a lower Yen to continue throughout 2013 and beyond.

Q213 105
Q313 112
Q413 116
Q114 117
E2014 118


We revise our short and medium term forecasts for AUD lower against the US dollar.

The Reserve Bank of Australia decided to lower the cash rate 25 basis points, to 2.75, at its last meeting on May 7th. This came as somewhat of a surprise to many observers. Further, in the accompanying statement Governor Stevens again mentioned explicitly the “historically high” level of the currency. It also suggested puzzlement at the AUD strength, given the fall in Australian export prices.

In view of the prospect for further cuts in the cash rate, as well as our general view of strength in the US dollar against all major currencies, we revise our forecasts for AUD moderately lower.

Q213 0.98
Q313 0.97
Q413 0.96
Q114 0.95
E2014 0.95


We revise our short and medium term forecasts for ZAR lower against the US dollar.

Macroeconomic indicators in South Africa have taken a clear turn for the worse. The manufacturing sector probably contracted by high single digits in the first quarter. The new deterioration in labor relations ain the mining industry also added to the general gloom. We now expect the SARB to cut rates in the next three months. We revise our forecasts for ZAR against the USD lower.

Q213 9.50
Q313 9.70
Q413 9.80
Q114 9.90
E2014 10.0


Written by Tom Tong

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