CURRENCY FACT SHEETS - Julius Baer Group · CURRENCY FACT SHEETS GLOBAL ECONOMIC RESEARCH | 31...

CURRENCY FACT SHEETS GLOBAL ECONOMIC RESEARCH | 31 March 2017

JULIUS BAER CURRENCY STRATEGY G10 currencies Page

● USD: Growing competition in the bullish camp 2

● EUR: Warming up for a comeback 3

● JPY: Lasting headwind from zero interest rates 4

● GBP: Triggered Brexit may lead to pound volatility 5

● CHF: To remain strong against the euro 6

● NOK: Suffering from falling inflation and oil prices 7

● SEK: Near end to Riksbank QE supports bullish case 8

● CAD: Loonie floats between oil spills & a (lame?) duck 9

● AUD: Shrinking carry advantage 10

● NZD: Stronger USD to dominate over domestic strength 11

Emerging market currencies

● CNY: Steady and ready for the xi-trump meeting 12

● IDR: Balanced risks 13

● INR: Boost from election win 14

● KRW: Exposed to USD moves, risks from China 15

● SGD: Returning to a positive slope in October? 16

● BRL: On a stable path 17

● MXN: A brighter future for the mexico-us relationship? 18

● CZK: End to currency cap is nearing 19

● HUF: Unconventional policy easing is a headwind 20

● PLN: Growth picks up despite policy skirmish 21

● RUB: Carry me home 22

● TRY: Political risks intensify 23

● ZAR: Heavy burden from politics 24

Source: Bloomberg Finance L.P., Julius Baer

Frankfurt, +49 (0)69 9074 3580

Julius Baer Research | Please find important legal information at the end of this document.

CURRENCY FACT SHEETS

APRIL 2017

3-month and 12-month ranking relative to 24 currencies covered by JB economic research. Based on expected return over forward.

Arrows indicate change in bullish/neutral/bearish view vs. last month.

Global Economic Research

Zurich, +41 (0)58 888 8100

CZK

SEK

INR

USD

EUR

MXN

CHF

NZD

ZAR

SGD

PLN

NOK

KRW

BRL

IDR

RUB

CAD

CNY

TRY

AUD

JPY

HUF

GBP

bearish neutral bullish

12 months 3 monthsChange to previous

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▲

▲

▼

▼

▲

▲

▼

▼

▼

1/27

CURRENCY FACT SHEETS - April 2017 GLOBAL ECONOMIC RESEARCH | 31 March 2017

JB CURRENCY STRATEGY CURRENCY OUTLOOK

●

●

●

OPPORTUNITIES Valuation (against EUR) Valuation (against JPY)

●

●

●

* Weighted average of various models * Weighted average of various models

Source: Datastream, Goldman Sachs, Julius Baer Source: Datastream, Goldman Sachs, Julius Baer

RISKS Forecasts Current and capital account balances*

● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

EURUSD 1.07 1.07 1.07

●Consensus 1.05 1.05

USDJPY 111.7 115.0 120.0

Consensus 115.5 116.8

●USDCHF 1.00 1.00 1.00

Consensus 1.02 1.02

GBPUSD 1.25 1.20 1.16

Consensus 1.21 1.21

Source: Datastream, Julius Baer

Market backdrop Economic fundamentals United States

spot v. EUR v. JPY 2016E 2017E 2015 2016E 2017E

3M Rate 1.15% 148bp 113bp Gross Domestic Product (GDP, %) 2.6 1.6 2.5 CA balance (% of GDP) -2.6 -2.7 -3.2

10Y Yield 2.41% 208bp 234bp Consumer Price Inflation (CPI, %) 0.1 1.3 2.4 Budget balance (% of GDP) -4.5 -5.0 -5.1

3M Fwrd 1.07 111.26 Fed Funds Target Rate (%, e. of per.) 0.50 0.75 1.50 Gross public debt (% of GDP) 126.0 127.6 127.3

12M Fwrd 1.09 109.64 10y bond yields (%, end of period) 2.24 2.49 2.65 Gross external debt (% of GDP) 96.4 98.3 98.1

3M Vola 9.04 9.55 Exchange rate regime: independently free-floating

Source: Bloomberg Finance L.P., Julius Baer Source: Bloomberg Finance L.P., Oxford Economics, Julius Baer

Positive interest-rate differential

versus EUR and JPY.

USD: GROWING COMPETITION IN THE BULLISH CAMPThe USD still enjoys support from the inflationary impact of Trump's policy agenda and higher interest rates,

but gets some competition from EUR and CHF. We share a softened bullish consensus view.

3-month and 12-month ranking relative to 24

currencies covered by JB economic research.

Based on expected return over forward.

The USD is a structural safe-

haven currency.

Prospect of additional Fed rate

hikes.

US President Donald Trump’s main policy initiatives are fiscal spending, protectionism and tighter

immigration. The inflationary impact of these initiatives drives markets and policy interest rates higher,

supporting the USD.

Trump's failure to repeal Obamacare has raised questions about his ability to realise policy initiatives.

We are reluctant to generalise this failure to the remaining policy agenda.

The USD remains fundamentally overvalued, limiting the dollar’s longer-term upside potential.

A stronger USD is a headwind

for US company profits.

Current-account balance, basic

balance and trade balance are

negative.


Source: Bloomberg Finance L.P., Consensus Economics, Julius Baer

bla

* Trade: goods and services balance; FDI: foreign direct investment;

CA : current account balance; Basic: CA plus FDI

2015

Contacts

David Kohl, Frankfurt, +49 (0) 69 9074 3580, [email protected]

Monetary policy framework: inflation targeting (close below

2%)

Risk appetite promotes

investments outside the USD.


1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

10 11 12 13 14 15 16 17 18

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

EUR/USD EUR/USD

Standard deviation Fair Value*

EUR/USD Spot, Forecast

70

80

90

100

110

120

130

10 11 12 13 14 15 16 17 18

70

80

90

100

110

120

130

USD/JPY USD/JPY


USD/JPY Spot, Forecast

-7

-6

-5

-4

-3

-2

-1

0

1

06 07 08 09 10 11 12 13 14 15 16 17

-7

-6

-5

-4

-3

-2

-1

0

1

% of GDP % of GDP

Trade FDI CA Basic

2/27



●

●

●

OPPORTUNITIES Valuation (against USD) Valuation (against JPY)

●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

EURUSD 1.07 1.07 1.07


●EURJPY 119.3 123.1 128.4


EURCHF 1.07 1.07 1.07

Consensus 1.07 1.08

EURGBP 0.86 0.89 0.92

Consensus 0.87 0.87


Market backdrop Economic fundamentals Eurozone

spot v. USD v. JPY 2016E 2017E 2015 2016E 2017E

3M Rate -0.33% -148bp -34bp Gross Domestic Product (GDP, %) 1.9 1.7 1.6 CA balance (% of GDP) 3.1 3.4 2.7

10Y Yield 0.33% -208bp 26bp Consumer Price Inflation (CPI, %) 0.0 0.2 1.6 Budget balance (% of GDP) -2.1 -1.7 -1.4

3M Fwrd 1.07 119.35 ECB main refi rate (%, end of period) 0.05 0.00 0.00 Gross public debt (% of GDP) 90.4 90.0 89.0

12M Fwrd 1.09 119.44 10y bond yields (%, end of period) 0.60 0.20 0.80 Gross external debt (% of GDP) 121.2



Monetary policy framework: inflation targeting (close below

2%)



bla



2015

Contacts


Money outflows.

Very attractive as a financing

currency.

EUR: WARMING UP FOR A COMEBACKThe unpopularity among speculators and investors continues to recede. Speculation about an end to negative

deposit rates makes the euro almost as appealing as the US dollar.




Efforts by the ECB to weaken

the currency.

Unwinding of large euro short

positions in times of rising risk

aversion could push up the euro.

The trade surplus ensures

money inflows.

The ECB’s commitment to price

stability protects the value of

the euro.

Very low inflation means that the euro’s purchasing power remains very solid, which, together with a solid

balance-of-payments situation, is the major tailwind for the euro.

The outlook for the eurozone is improving, with very solid growth trends in industrial activity and retail

sales and leading indicators pointing to further acceleration. The European Central Bank (ECB) allows

some speculations about the phasing out of unconventional policy given the solid backdrop.

Money outflows have slowed and announced M&A flows are turning in favour of the EUR.


1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

10 11 12 13 14 15 16 17 18

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

EUR/USD EUR/USD


EUR/USD Spot, Forecast

90

100

110

120

130

140

150

10 11 12 13 14 15 16 17 18

90

100

110

120

130

140

150

EUR/JPY EUR/JPY


EUR/JPY Spot, Forecast

-4

-3

-2

-1

0

1

2

3

4

05 06 07 08 09 10 11 12 13 14 15 16 17

-4

-3

-2

-1

0

1

2

3

4

% of GDP % of GDP

Trade FDI CA Basic

3/27



●

●

●

OPPORTUNITIES Valuation (against USD) Valuation (against EUR)

●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDJPY 111.7 115.0 120.0


EURJPY 119.3 123.1 128.4


JPYCHF 0.90 0.87 0.83

Consensus 0.88 0.88

GBPJPY 139.3 138.3 139.6



Market backdrop Economic fundamentals Japan

spot v. USD v. EUR 2016E 2017E 2015 2016E 2017E

3M Rate 0.01% -113bp 34bp Gross Domestic Product (GDP, %) 0.0 0.0 0.0 CA balance (% of GDP) 3.1 3.8 4.1

10Y Yield 0.07% -234bp -26bp Consumer Price Inflation (CPI, %) 0.8 -0.1 0.4 Budget balance (% of GDP) -5.1 -5.0 -6.1

3M Fwrd 111.26 119.35 BoJ O/N Rate (%, end of period) 0.10 -0.10 -0.10 Gross public debt (% of GDP) 216.4 219.5 222.4




JPY: LASTING HEADWIND FROM ZERO INTEREST RATESThe BoJ policy of a 0% yield target and overshooting inflation result in deeply negative rates, which will lead to

a weaker JPY. We hold on to a bearish view in line with consensus view.




The current policy of the Bank of Japan (BoJ) of a 0% yield target is becoming effective as bond yields

face global upwards pressure. A widening yield differential drives the JPY lower.

Negative yen positioning and bearish views remain in place but money outflows are easing.

The unsustainable fiscal positions justify caution over the longer term as debt monetisation is starting.

True success of Abe’s reform

agenda would strengthen the

JPY.

The interest-rate differential

could turn even more negative.

Use of the JPY as a carry-trade

financing vehicle.



bla* Trade: goods and services balance; FDI: foreign direct investment;


2015

Monetary policy framework: inflation targeting

Contacts


The JPY is undervalued.

Japan’s net-creditor position

results in inflows during times of

trouble.

Japan's authorities favour a

weak currency to achieve their

ambitious growth and inflation

targets.


-4

-3

-2

-1

0

1

2

3

4

5

05 06 07 08 09 10 11 12 13 14 15 16 17

-4

-3

-2

-1

0

1

2

3

4

5

% of GDP % of GDP

Trade FDI CA Basic

70

80

90

100

110

120

130

10 11 12 13 14 15 16 17 18

70

80

90

100

110

120

130

USD/JPY USD/JPY

Standard deviation Fair Value*USD/JPY Spot, Forecast

90

100

110

120

130

140

150

10 11 12 13 14 15 16 17 18

90

100

110

120

130

140

150

EUR/JPY EUR/JPY


EUR/JPY Spot, Forecast

4/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

GBPUSD 1.25 1.20 1.16


EURGPB 0.86 0.89 0.92

Consensus 0.87 0.87

●GBPCHF 1.25 1.20 1.16

Consensus 1.23 1.24

GBPJPY 139.3 138.3 139.6



Market backdrop Economic fundamentals UK


3M Rate 0.34% -81bp 67bp Gross Domestic Product (GDP, %) 2.2 1.8 1.4 CA balance (% of GDP) -4.3 -4.5 -3.3


3M Fwrd 1.25 0.86 BoE base rate (%, end of period) 0.5 0.3 0.3 Gross public debt (% of GDP) 89.0 89.2 88.8




GBP: TRIGGERED BREXIT MAY LEAD TO POUND VOLATILITYWith the Brexit process triggered, short-term volatility can be expected, depending on the political news flow.

Negative Brexit-related drivers will kick in, justifying our bearish overall GBP outlook.



Based on expected return over forward. Shortfalls in foreign-direct investments, expected to accelerate once Brexit negotiations create more

economic uncertainty, are the main reason for our overall bearish pound outlook.

Markets react calmly to triggering of Article 50. Key for GBP-volatility will be whether both parties can

converge towards more common and compatible views on the Brexit process and deal.

Macro data are ambiguous: softer leading indicators, pointing to first Brexit-related softening of

momentum are offset by overshooting inflation, raising speculation on a near BoE rate hike.

Loss of EU single-market access

('hard Brexit' scenario).

Political risks, alongside the

Brexit process, may lead to

spikes in volatility.

Preservation of EU single-

market access ('soft Brexit'

scenario).

Great repeal bill' offers hopes of

continuity and less disruptions

after Brexit.

Resilience of growth and GBP

weakness to fully cancel any

further BoE response to Brexit.

Reversal of fiscal austerity

efforts due to Brexit could scale

back fiscal consolidation plans.






2015

Monetary policy framework: inflation targeting (2%±1%

y/y)

Contacts

David A. Meier, Zurich, +41 (0)58 886 2388, [email protected]


-10

-5

0

5

10

05 06 07 08 09 10 11 12 13 14 15 16 17

-10

-5

0

5

10

% of GDP % of GDP

Trade FDI CA Basic

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

10 11 12 13 14 15 16 17 18

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

EUR/GBP EUR/GBP


EUR/GBP Spot, Forecast

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

10 11 12 13 14 15 16 17 18

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

GBP/USD GBP/USD


GBP/USD Spot, Forecast

5/27



●

●

●

OPPORTUNITIES Valuation (against EUR) Valuation (against USD)

●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USD/CHF 1.00 1.00 1.00

Consensus 1.02 1.02

●EUR/CHF 1.07 1.07 1.07

Consensus 1.07 1.08

JPY/CHF 0.90 0.87 0.83


GBP/CHF 1.25 1.20 1.16

Consensus 1.23 1.24


Market backdrop Economic fundamentals Switzerland

Spot v. USD v. EUR 2016E 2017E 2015 2016E 2017E


10Y Yield -0.09% -250bp -42bp Consumer Price Inflation (CPI, %) -1.1 -0.4 0.8 Budget balance (% of GDP) 1.1 0.2 0.3

3M Fwrd 1.00 1.07 SNB 3M Libor Target (%, end of per.) -0.8 -0.8 -0.8 Gross public debt (% of GDP) 34.2 33.8 32.8

12M Fwrd 0.98 1.06 10y bond yields (%, end of period) -0.2 -0.1 0.1 Gross external debt (% of GDP) 230.9 230.9 231.5

3M Volatility 7.47 5.32 Exchange rate regime: independently free-floating


A loss of market appeal or a

general surge in risk appetite

can cause a CHF drop.



bla

Contacts

Janwillem C. Acket, Zurich, +41 (0)58 888 8100, [email protected]


2015



Monetary policy framework: inflation and growth

Negative interest rates hardly

deter panicky safe-haven flows

and hurt domestic depositors.

The Swiss economy is vulnerable

to shocks, keeping the SNB at

the ECB’s mercy.

CHF: TO REMAIN STRONG AGAINST THE EURO

The CHF is traditionally a safe-

haven currency.

The Swiss National Bank (SNB) can currently tolerate a stronger, even significantly overvalued currency

against the euro, as the CHF is undervalued against the USD.




SNB currency interventions since May 2016 showed limitations in stabilising the CHF: the only currency

to profit from policy risks in Europe, where overall market volatility is low.

Continued strong fundamental EUR/CHF overvaluation keeps deflation and recession risks in

Switzerland alive, forcing the SNB to strive for a weaker CHF and to prevent further appreciation.

Current loose ECB policy at best allows only modest CHF weakening potential. We expect the SNB to fire

its negative interest rate 'bazooka' IF EUR/CHF goes rapidly below 1.05 and approaches parity.

The SNB alone is not able to

weaken the CHF with ease: it

needs tailwinds from markets.

International debt and

geopolitical market tensions

could escalate anytime and

strengthen the CHF.


-20

-15

-10

-5

0

5

10

15

20

06 07 08 09 10 11 12 13 14 15 16 17

-20

-15

-10

-5

0

5

10

15

20

% of GDP % of GDP

Trade FDI CA Basic*

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

10 11 12 13 14 15 16 17 18

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

EUR/CHF EUR/CHF

Standard deviation Fair Value*EUR/CHF Spot, Forecast

0.7

0.8

0.9

1.0

1.1

1.2

1.3

10 11 12 13 14 15 16 17 18

0.7

0.8

0.9

1.0

1.1

1.2

1.3

USD/CHF USD/CHF


USD/CHF Spot, Forecast

6/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

●USDNOK 8.60 8.69 8.74

Consensus 8.45 8.28

EURNOK 9.18 9.30 9.35

Consensus 8.86 8.72

GBPNOK 10.72 10.45 10.16


CHFNOK 8.59 8.69 8.74

Consensus 8.31 8.09


Market backdrop Economic fundamentals Norway



10Y Yield 1.64% -77bp 132bp Consumer Price Inflation (CPI, %) 2.0 3.9 2.5 Budget balance (% of GDP) 7.6 5.0 4.0

3M Fwrd 8.59 9.21 Repo Rate (%, end of period) 0.75 0.50 0.50 Gross public debt (% of GDP) 39.1 41.5 43.6




Norges Bank to reconsider rate

cuts due to dropping inflation

and continued European Central

Bank (ECB) monetary policy

easing.

Vulnerability to swings in risk

aversion/global growth risks.



Source: Bloomberg Finance L.P., Consensus Economics, Julius

Baer

bla



2015

Monetary policy framework: inflation targeting (2.5%±1%

y/y)

Contacts


NOK: SUFFERING FROM FALLING INFLATION AND OIL PRICESInflation disappointment keeps the downside risk on rates alive, while sluggish oil prices do not offer much

resistance. We stick to a neutral outlook and wait for better times.




With mainland growth still struggling to gain traction, recent data disappointments contrast with

now more optimistic leading indicators. Dependence of overall output from the oil sector remains

large.

A renewed setback in oil prices.

Inflation is disappointing and will likely be pushed lower going forward. The Norges Bank sees larger

downside risks to rates, which justifies maintaining a cautious long-term NOK outlook.

The oil price and downside risks on interest rates remain the main reasons for our belief that the

krone will not benefit from its otherwise solid fundamentals (current-account surplus).

An upside surprise in oil prices.

A convincing bottoming-out of

the offshore (oil-producing)

economy.

The NOK enjoys continuous

structural support from a

current-account surplus.


5.05.56.06.57.07.58.08.59.0

10 11 12 13 14 15 16 17 18

5.05.56.06.57.07.58.08.59.0

USD/ NOK

USD/ NOK

Standard deviation Fair Value*USD/NOK Spot, Forecast

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

10 11 12 13 14 15 16 17 18

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

EUR/NOK EUR/NOK


EUR/NOK Spot, Forecast

-15

-10

-5

0

5

10

15

20

05 06 07 08 09 10 11 12 13 14 15 16 17

-15

-10

-5

0

5

10

15

20

% of GDP % of GDP

Trade FDI CA Basic

7/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDSEK 8.93 8.79 8.60


EURSEK 9.54 9.40 9.20

Consensus 9.41 9.15●

GBPSEK 11.14 10.56 10.00


CHFSEK 8.93 8.79 8.60

Consensus 8.82 8.49


Market backdrop Economic fundamentals Sweden




3M Fwrd 8.89 9.54 Riksbank Repo Rate (%, end of per.) -0.35 -0.50 -0.50 Gross public debt (% of GDP) 53.8 50.8 48.3




Limitations to the rise of

inflation beyond base effects.

Riksbank’s unpredictability in

monetary policy easing with

focus on currency weakening.

Vulnerability to swings in risk

aversion.

More upside surprises in cyclical

data.

Risk of Riksbank falling behind

the curve, prompting near-term

monetary policy tightening.

Healthy fundamentals such as

current-account surplus and

sustainable public-debt level.



Baer

bla



2015

Contacts


Monetary policy framework: inflation targeting (2%±1% y/y)


SEK: NEAR END TO RIKSBANK QE SUPPORTS BULLISH CASEThe foreseeable end to Riksbank asset purchases lifts the burden of monetary policy off the krona. We

maintain our bullish SEK outlook and recommend using setbacks as entry points.



Based on expected return over forward. The burden of monetary policy on the krona is receding, and its fundamental strength is finally coming

through. Eventual setbacks on the road offer entry points.

Some temporal sluggishness, leading to data disappointments, interrupted the krona's recovery.

Nevertheless, robust consumption data and buoyant leading indicators suggest acceleration ahead.

The SEK30bn extension of asset purchases was a nice try to weaken the krona but could not deter

market's conviction that a continuation of stimulus beyond mid-2017 has become unlikely.


5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10 11 12 13 14 15 16 17 18

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

USD/SEK USD/SEK


USD/SEK Spot, Forecast

8.0

8.5

9.0

9.5

10.0

10.5

10 11 12 13 14 15 16 17 18

8.0

8.5

9.0

9.5

10.0

10.5

EUR/SEK EUR/SEK


EUR/SEK Spot, Forecast

-6

-1

4

9

14

05 06 07 08 09 10 11 12 13 14 15 16 17

-6

-1

4

9

14

% of GDP % of GDP

Trade FDI CA Basic

8/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDCAD 1.33 1.35 1.36

Consensus 1.35 1.35

●EURCAD 1.42 1.44 1.46

Consensus 1.42 1.42

GBPCAD 1.66 1.62 1.58


CHFCAD 1.33 1.35 1.36

Consensus 1.33 1.32


Market backdrop Economic fundamentals Canada




3M Fwrd 1.33 1.43 BoC O/N Rate (%, end of period) 0.50 0.50 0.50 Gross public debt (% of GDP) 98.4 99.9 98.1




US protectionism 'light', with no

major consequences for

Canada.

CAD-relevant commodity prices

to strengthen further.

Interest-rate normalisation

coming into sight for mid-2018.

US protectionism 'hard', with

negative consequences for

Canada.

CAD: LOONIE FLOATS BETWEEN OIL SPILLS & A (LAME?) DUCKFading conviction in US President Trump's protectionism weakens concern about impact on the CAD but

remains a risk factor. A stable Bank of Canada policy supports our neutral stance.




Economic data continues to surprise, with leading indicators suggesting an accelerating economic

momentum ahead. With inflation looking solid at 2%, the Bank of Canada is now set firmly on a hold.

US President Trump's struggles in Washington further weaken concerns over disruptions to Canadian

exports. Proceeding rate normalisation in the US, however, could hold back the CAD.

Persistent undervaluation (vs. USD) offers potential. Higher oil prices and prospects of Bank of Canada

rate normalisation are the necessary catalysts for a more optimistic CAD outlook.

Liberal government’s public

spending plans worsen public-

sector indebtedness.

High current-account deficit and

large household debt are

structural burdens.






2015


y/y)

Contacts



0.9

1.0

1.1

1.2

1.3

1.4

1.5

10 11 12 13 14 15 16 17 18

0.9

1.0

1.1

1.2

1.3

1.4

1.5

USD/CAD USD/CAD

Standard deviation Fair Value*USD/CAD Spot, Forecast

1.0

1.2

1.4

1.6

1.8

2.0

2.2

10 11 12 13 14 15 16 17 18

1.0

1.2

1.4

1.6

1.8

2.0

2.2

EUR/CAD EUR/CAD


EUR/CAD Spot, Forecast

-6

-4

-2

0

2

4

05 06 07 08 09 10 11 12 13 14 15 16 17

-6

-4

-2

0

2

4

% of GDP % of GDP

Trade FDI CA Basic

9/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

AUDUSD 0.76 0.74 0.72

Consensus 0.74 0.72

EURAUD 1.40 1.45 1.49


●AUDJPY 85.3 85.1 86.4

Consensus 85.3 84.5

AUDCHF 0.76 0.74 0.72

Consensus 0.75 0.74


Market backdrop Economic fundamentals Australia

spot v. USD v. JPY 2016E 2017E 2015 2016E 2017E



3M Fwrd 0.76 84.79 RBA Cash Rate (%, end of period) 2.00 1.50 1.50 Gross public debt (% of GDP) 43.5 47.4 47.2







bla



2015

Monetary policy framework: inflation targeting (2-3% y/y)

Contacts

Susan Joho, Zurich, +41 (0)58 886 2493, [email protected]

Renewed problems in the

Chinese housing market and a

slowing of the Chinese

economy.

Current-account deficit.

Interest-rate cut.

AUD: SHRINKING CARRY ADVANTAGEOur bearish stance on the AUD is based on a topping out of commodity prices both in the energy and metals

space and shrinking USD-AUD yield advantage.




A resumption of a China slowdown will likely hurt steel prices and the AUD over the short to mid term.

Moreover, rising trade risks with the USA and China put the AUD at risk of collateral damage.

The Reserve Bank of Australia sends strong signals that it will hold interest rates stable over the next

year. The low level of 1.5% will erode yield advantage vs. the USD rapidly in 2017.

Structurally lower demand for Australian commodities should keep the AUD at weaker levels in the

longer term.

Nominal interest rates still offer

some carry and are among the

highest in the G10.

There is demand for the AUD in

the diversification of reserve

currencies.

Monetary policy easing in Japan

could lead to renewed capital

inflows from Japan.


0.5

0.6

0.7

0.8

0.9

1.0

1.1

10 11 12 13 14 15 16 17 18

0.5

0.6

0.7

0.8

0.9

1.0

1.1

AUD/USD AUD/USD


AUD/USD Spot, Forecast

40

50

60

70

80

90

100

110

10 11 12 13 14 15 16 17 18

40

50

60

70

80

90

100

110

AUD/JPY AUD/JPY


AUD/JPY Spot, Forecast

-8

-6

-4

-2

0

2

4

6

05 06 07 08 09 10 11 12 13 14 15 16 17

-8

-6

-4

-2

0

2

4

6

% of GDP % of GDP

Trade FDI CA Basic

10/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

●NZDUSD 0.70 0.69 0.68


EURNZD 1.53 1.55 1.57

Consensus 1.51 1.54

AUDNZD 1.09 1.07 1.06

Consensus 1.06 1.06

NZDCHF 0.70 0.69 0.68

Consensus 0.71 0.70


Market backdrop Economic fundamentals New Zealand



10Y Yield 3.19% 78bp 312bp Consumer Price Inflation (CPI, %) 0.3 0.7 1.8 Budget balance (% of GDP) 0.8 0.9 1.2

3M Fwrd 0.70 1.54 RBNZ Rate (%, end of period) 2.50 1.75 1.75 Gross public debt (% of GDP) 29.9 29.9 29.2

12M Fwrd 0.69 1.57 10y bond yields (%, end of period) 3.55 3.33 3.90 Gross external debt (% of GDP) 101.0



NZD: STRONGER USD TO DOMINATE OVER DOMESTIC STRENGTHWe are neutral on New Zealand's currency, which remains caught between a declining carry vs. USD and strong

domestic activity. With coming USD strength, a mild weakening is likely.




Q4 inflation led the Reserve Bank of New Zealand’s 1%-3% inflation target band to rise to 1.3% y/y.

Given an expected slower rise towards 2% over 2017, a cautious stance with stable rates is most likely.

Dairy prices continue to recover but are not likely to increase to old highs, thus not providing much

support to the NZD in the coming months.

The declining yield advantage vs. the USD will weigh on NZD, with a better economic outlook providing

some balancing support in the longer term.

Highest interest rates among

G10 countries.


Tourism sector to replace dairy

as the most important export

sector.

Resilient economic growth due

to additional demand and

supply from past strong net

immigration.

Overheating housing market.

Current-account deficit.

Reversal of past immigration.



bla



2015


y/y)

Contacts



0.5

0.6

0.7

0.8

0.9

1.0

1.1

10 11 12 13 14 15 16 17 18

0.5

0.6

0.7

0.8

0.9

1.0

1.1

NZD/USD NZD/USD


NZD/USD Spot, Forecast

50

60

70

80

90

10 11 12 13 14 15 16 17 18

50

60

70

80

90

NZD/JPY NZD/JPY


NZD/JPY Spot, Forecast

-10

-8

-6

-4

-2

0

2

4

05 06 07 08 09 10 11 12 13 14 15 16 17

-10

-8

-6

-4

-2

0

2

4

% of GDP % of GDP

Trade FDI CA Basic

11/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDCNY 6.88 7.05 7.20


●EURCNY 7.35 7.54 7.70

Consensus 7.37 7.62

CHFCNY 6.87 7.05 7.20

Consensus 6.91 7.07

JPYCNY 6.16 6.13 6.00

Consensus 6.09 6.19


Market backdrop Economic fundamentals China


3M Rate 4.39% 325bp 472bp Gross Domestic Product (GDP, %) 6.9 6.7 6.5 CA balance (% of GDP) 3.0 1.9 1.4


3M Fwrd 6.93 7.43 PBC Lending Rate (%, end of period) 4.35 Gross public debt (% of GDP) 15.5 18.3 20.8

12M Fwrd 7.06 7.64 10y bond yields (%, end of period) 2.84 Gross external debt (% of GDP) 11.8 9.3 9.6

3M Vola 3.89 7.41 Exchange rate regime: crawling peg (USD)


Trade war with the US.

Depletion of FX reserves.

CNY: STEADY AND READY FOR THE XI-TRUMP MEETINGAfter a period of sideways movement owing to stabilisation efforts, the yuan will weaken further against the

USD during the next phase of USD strengthening. We remain constructive due to considerable carry.




Exacerbation of the economic

downturn.

Long-term potential and current-

account surplus.

Capital-account liberalisation in

the longer run.

Chinese leaders aim for overall stability in this important year of power change. For the yuan, that means

discouraging outflows and some reversal of the internationalisation to protect FX reserves.

Concerned about financial risks, the People's Bank of China is tightening monetary conditions slightly.

We expect this trend to stop in H2 together with softer economic growth.

Cyclical and structural pressures in the economy, its balance of payments and a widening US-China yield

differential in H2 lead us to expect a mild depreciation against the USD over the coming year.

A stronger CNY is consistent

with internal economic

rebalancing.






2015

Monetary policy framework: inflation and growth

Contacts



5.5

6.0

6.5

7.0

7.5

8.0

8.5

10 11 12 13 14 15 16 17 18

5.5

6.0

6.5

7.0

7.5

8.0

8.5

USD/CNYUSD/CNY

Standard deviation Fair Value*USD/CNY Spot, Forecast

6

7

8

9

10

11

12

10 11 12 13 14 15 16 17 18

6

7

8

9

10

11

12

EUR/CNYEUR/CNY


EUR/CNY Spot, Forecast

-20246810121416

05 06 07 08 09 10 11 12 13 14 15 16 17

-202468

10121416

% of GDP% of GDP

Trade FDI CA Basic

12/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDIDR 13322

●Consensus

EURIDR 14248

Consensus

CHFIDR 13309

Consensus

●JPYIDR 11929 12250

Consensus 11752


Market backdrop Economic fundamentals Indonesia




3M Fwrd 13431 14406 BI Reference Rate (%, end of period) 7.50 Gross public debt (% of GDP) 29.9 30.9 34.2

12M Fwrd 13933 15130 10y bond yields (%, end of period) 8.87 Gross external debt (% of GDP) 36.4 32.9 32.9



IDR: BALANCED RISKSWe maintain our neutral stance on the Indonesian rupiah and expect a mild depreciation of the currency along

with US dollar strength. The high yield and lower volatility make up for it.




14700

13728

Slower Chinese growth; lower

commodity prices.

Bold reforms by the Jokowi

government could foster new

growth in the longer term.

Solid domestic demand growth.

Bank Indonesia signals stable interest rates in 2017, keeping a watchful eye on inflation. Energy prices

will rise as the government cuts energy subsidies to use these funds more productively.

Growth is likely to remain stable around 5%, while last year's 150pb of interest-rate cuts still fail to revive

rather muted credit growth.

The pass-through of important reforms has somewhat lifted investor confidence, but weak

fundamentals, such as a current-account deficit and overvaluation, should continue to weigh on IDR.


14552

New measures supporting IDR

liquidity to reduce volatility.

14231

13349

Slow step-by-step reform

implementation, especially with

regard to infrastructure

investment, given budget

deficit.

Accumulation of FX reserves

when possible caps upside.


13600

13579




2015

Contacts


13600

11755


y/y)

11826

13422

14456

14700

15729


-4

-2

0

2

4

6

05 06 07 08 09 10 11 12 13 14 15 16 17

-4

-2

0

2

4

6

% of GDP % of GDP

Trade FDI CA Basic

8000

10000

12000

14000

16000

18000

20000

22000

10 11 12 13 14 15 16 17 18

8000

10000

12000

14000

16000

18000

20000

22000

USD/IDR USD/IDR

Standard deviation Fair Value*USD/IDR Spot, Forecast

10000

15000

20000

25000

30000

10 11 12 13 14 15 16 17 18

10000

15000

20000

25000

30000

EUR/IDR EUR/IDR


EUR/IDR Spot, Forecast

13/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDINR 64.85 65.00 66.00


EURINR 69.30 69.55 70.62


●CHFINR 64.79 65.00 66.00


JPYINR 58.07 56.52 55.00



Market backdrop Economic fundamentals India




3M Fwrd 65.39 70.39 Official Prime Rate (%, end of period) 6.75 Gross public debt (% of GDP) 47.3 48.9 50.3


3M Vola 5.52 8.78 Exchange rate regime: managed floating


INR: BOOST FROM ELECTION WINWe remain bullish, expecting a resilient rupee due to good currency management and improved fundamentals.

Moreover, low volatility makes the rupee our most attractive high-yielding currency.




The Reserve Bank of India shifted from an accommodative to a neutral stance, committed to its inflation

target and ensuring high carry in 2017.

The election win of the ruling party in the important Uttar Pradesh boosted investor sentiment and INR.

Further gains, however, are unlikely with the coming tax avoidance rules acting as a headwind.

Steady flow of reforms should keep realistic expectations for fundamental change alive. Implementation

of the important goods-and-service tax reform will come next, probably in summer.



Ongoing reforms to enhance

productivity and supply.




2015

Contacts



Credible and ambitious

monetary policy to lower

inflation further towards 4% and

keep FX volatility low.

Attractive interest-rate carry

and improving balance-of-

payments fundamentals.

High rate of non-performing

loans

A rise in inflation due to GST

reform and implementation of

higher government wages.

Political gridlock.


-8

-6

-4

-2

0

2

05 06 07 08 09 10 11 12 13 14 15 16 17

-8

-6

-4

-2

0

2

% of GDP % of GDP

Trade FDI CA Basic

40

45

50

55

60

65

70

75

10 11 12 13 14 15 16 17 18

40

45

50

55

60

65

70

75

USD/INR USD/INR

Standard deviation Fair Value*USD/INR Spot, Forecast

50

60

70

80

90

100

10 11 12 13 14 15 16 17 18

50

60

70

80

90

100

EUR/INR EUR/INR


EUR/INR Spot, Forecast

14/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

●USDKRW 1118 1130 1150

●Consensus 1181 1193

EURKRW 1195 1209 1231

Consensus 1238 1256

CHFKRW 1117 1130 1150

Consensus 1161 1166

JPYKRW 10.01 9.83 9.58



Market backdrop Economic fundamentals South Korea


3M Rate 1.42% 27bp 175bp Gross Domestic Product (GDP, %) 2.6 2.7 2.5 CA balance (% of GDP) 7.7 7.1 6.4


3M Fwrd 1117 1198 BoK Rate (%, end of period) 1.50 Gross public debt (% of GDP) 48.1 49.7 50.4

12M Fwrd 1111 1210 10y bond yields (%, end of period) 2.09 Gross external debt (% of GDP) 29.2 26.8 26.7



Increased global risk appetite.

KRW: EXPOSED TO USD MOVES, RISKS FROM CHINAWe remain cautious but neutral on the Korean won, which remains vulnerable to renewed USD appreciation.

Latest gains were domestically driven; considerable risks surrounding China, however, limit further KRW

strength.




Large current-account surplus.

The country maintains a solid

fiscal balance.

The Bank of Korea will hold policy rates stable in 2017, as inflation is going up and there are concerns

about large household debt. Growth to soften further, with fiscal support fading.

Negative effects from Chinese retaliation to hurt the Korean tourism sector and risks to weigh on KRW.

Fundamentals, i.e. a large current-account surplus, remain strong, but Korea would be very vulnerable to

a more hostile global trade environment with its strong export exposure to the US.

Capital outflow measures.






2015

Contacts


Monetary policy framework: inflation targeting (3%±0.5%

y/y)

Weakness in China.

The KRW is a high-beta

currency.


-1012345678910

05 06 07 08 09 10 11 12 13 14 15 16 17

-10123456789

10

% of GDP % of GDP

Trade FDI CA Basic

850

950

1050

1150

1250

10 11 12 13 14 15 16 17 18

850

950

1050

1150

1250

USD/KRW USD/KRW

Standard deviation Fair Value*USD/KRW Spot, Forecast

1100

1200

1300

1400

1500

1600

1700

10 11 12 13 14 15 16 17 18

1100

1200

1300

1400

1500

1600

1700

EUR/KRW EUR/KRW


EUR/KRW Spot, Forecast

15/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

●USDSGD 1.40 1.41 1.43

Consensus 1.45 1.47

EURSGD 1.49 1.51 1.53


CHFSGD 1.40 1.41 1.43

Consensus 1.43 1.42

JPYSGD 1.25 1.23 1.19

Consensus 1.26 1.26


Market backdrop Economic fundamentals Singapore



10Y Yield 2.25% -16bp 192bp Consumer Price Inflation (CPI, %) -0.5 -0.5 1.0 Budget balance (% of GDP) 0.6 -1.2 -0.6

3M Fwrd 1.40 1.50 Singapore O/N rate (%, end of per.) 0.72 Gross public debt (% of GDP) 114.3 121.5 124.2


3M Vola 5.22 6.86 Exchange rate regime: managed floating (composite)







2015

Monetary policy framework: currency regulation only

Contacts


Low global external demand.

Strong fundamentals make the

SGD a safe investment.

China’s slowdown.

Low yields make the SGD

increasingly attractive as a

regional carry-trade funder.

SGD: RETURNING TO A POSITIVE SLOPE IN OCTOBER? Due to its comparably higher liquidity in the region, the SGD is more sensitive to US rate normalisation. A still

neutral, but more constructive MAS could act as a support to SGD.



Based on expected return over forward. Despite the recovery in the industrial sector, low global external demand - in particular, a slowing China -

could continue to weigh on the highly export-dependent economy in the longer run.

Ongoing structural changes to

raise productivity in the longer

term.

Tends to profit from increased

risk appetite.

SGD remains more at risk from its sensitivity to US rate normalisation and trade protectionism.

The Monetary Authority of Singapore (MAS) will keep its monetary policy neutral at its semi-annual

meeting in April, but could become more constructive after strong economic data. Expectations for a

return to a positive slope of the band in which SGD is allowed to float by October support SGD.


1.0

1.1

1.2

1.3

1.4

1.5

1.6

10 11 12 13 14 15 16 17 18

1.0

1.1

1.2

1.3

1.4

1.5

1.6

USD/SGD USD/SGD

Standard deviation Fair Value*USD/SGD Spot, Forecast

1.4

1.5

1.6

1.7

1.81.9

2.0

2.1

2.2

10 11 12 13 14 15 16 17 18

1.4

1.5

1.6

1.7

1.81.9

2.0

2.1

2.2

EUR/SGD EUR/SGD


EUR/SGD Spot, Forecast

-15

-5

5

15

25

35

05 06 07 08 09 10 11 12 13 14 15 16 17

-15

-5

5

15

25

35

% of GDP % of GDP

Trade FDI CA Basic

16/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDBRL 3.17 3.28 3.60

Consensus 3.18 3.33

●EURBRL 3.38 3.51 3.85

Consensus 3.34 3.51

GBPBRL 3.95 3.94 4.19


CHFBRL 3.17 3.28 3.60

Consensus 3.13 3.26


Market backdrop Economic fundamentals Brazil


3M Rate 10.26% 912bp 1059bp Gross Domestic Product (GDP, %) -3.8 -3.6 0.0 CA balance (% of GDP) -3.2 -1.3 -1.2


3M Fwrd 3.23 3.47 SELIC Target Rate (%, end of period)14.25 Gross public debt (% of GDP) 65.5 69.9 74.7




High interest rates (though

declining) still make local

currency bonds attractive.

BRL: ON A STABLE PATHThe BRL continues on a stable path, reflecting the lack of major events. The Finance Minister has revised the

growth forecast for the year to 0.5%; emphasis is now on fiscal consolidation. We stay neutral on the BRL.




Since the beginning of 2017, news flows out of Brazil have been largely irrelevant for investors (except

the new corruption case in the protein sector), supporting the stability of the Brazilian real.

In terms of monetary policy, the story remains unchanged: the rapidly falling inflation (4.8% y/y in

February) and need to boost growth should lead to further easing (we expect 75bps rate cut in April).

On the fiscal front, authorities are making new efforts to reduce the deficit with the announcement of a

combination of spending freezes, fewer payroll tax breaks and a higher financial transaction tax.

Substantial change at the

political level is yet to translate

into higher economic growth.

Brazil has large international

reserves, which it has not used

to defend the currency.

This year's strong appreciation

may reflect excessively

optimistic views of investors.



Baer

bla



2015


y/y)

Contacts

Alejandro Hardziej, Zurich, +41 (0)58 886 2383, [email protected]


Weak macro fundamentals, with

only marginal positive growth

expected in 2017.

Fund flows are highly sensitive

to changes in US interest rates.


-5

-3

-1

1

3

5

05 06 07 08 09 10 11 12 13 14 15 16 17

-5

-3

-1

1

3

5

% of GDP % of GDP

Trade FDI CA Basic

1.5

2.0

2.5

3.0

3.5

4.0

4.5

10 11 12 13 14 15 16 17 18

1.5

2.0

2.5

3.0

3.5

4.0

4.5

USD/BRL USD/BRL

Standard deviation Fair Value*USD/BRL Spot, Forecast

1

2

3

4

5

6

7

10 11 12 13 14 15 16 17 18

1

2

3

4

5

6

7

EUR/BRL EUR/BRL


EUR/BRL Spot, Forecast

17/27



●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDMXN 18.8 19.1 20.0

Consensus 20.7 20.9

●EURMXN 20.1 20.4 21.4

Consensus 21.7 22.0

●GBPMXN 23.4 23.0 23.3

Consensus 25.0 25.3

CHFMXN 18.8 19.1 20.0

Consensus 20.4 20.4


Market backdrop Economic fundamentals Mexico




3M Fwrd 19.05 20.43 Banxico Rate (%, end of period) 3.3 Gross public debt (% of GDP) 51.4 55.7 55.0




Residual policy risks given the

US president’s hostile agenda

regarding Mexican workers in

the US.

The MXN is closely associated

with emerging markets and

subject to higher volatility.

The central bank remains fully

focused on controlling inflation

and volatility in the MXN.

Oil prices are important for

government revenues.

Future of US-Mexico ties may

not be as negative as feared,

given the improving dialogue.

Large international reserves and

room for further rate hikes

should protect the currency.

MXN: A BRIGHTER FUTURE FOR THE MEXICO-US RELATIONSHIP?After an initially heated exchange, dialogue between the Trump and Peña Nieto administrations has recently

become a lot more conciliatory. The MXN has reacted positively and we think it can stabilise further.




In March, the MXN appreciated another 6% against the USD, supported by the positive change in the

tone of dialogue between Mexico and the US. Trump's administration now seems to acknowledge the

need for mutual cooperation given the underlying complex and largely beneficial relationship.

The central bank hiked interest rates by another 25 basis points, to 6.5%, at the end of March. Though

smaller than the previous 50 bps increase, it reinforces the attractiveness of the MXN against other hard

currencies.





2015

Contacts

Alejandro Hardziej, Zurich, +41 (0)58 886 2383, [email protected]



y/y)


-3

-2

-1

0

1

2

3

05 06 07 08 09 10 11 12 13 14 15 16 17

-3

-2

-1

0

1

2

3

% of GDP % of GDP

Trade FDI CA Basic

111213141516171819202122

10 11 12 13 14 15 16 17 18

111213141516171819202122

USD/MXN USD/MXN

Standard deviation Fair Value*USD/MXN Spot, Forecast

12

14

16

18

20

22

24

26

10 11 12 13 14 15 16 17 18

12

14

16

18

20

22

24

26

EUR/MXN EUR/MXN


EUR/MXN Spot, Forecast

18/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDCZK 25.30 24.77 24.30


●EURCZK 27.02 26.50 26.00


●GBPCZK 31.55 29.78 28.26


CHFCZK 25.28 24.77 24.30



Market backdrop Economic fundamentals Czech Republic



10Y Yield 0.92% -149bp 59bp Consumer Price Inflation (CPI, %) 0.3 0.7 2.0 Budget balance (% of GDP) -1.4 1.3 -0.8

3M Fwrd 25.00 26.81 CNB Repo Rate (%, end of period) 0.05 Gross public debt (% of GDP) 36.7 34.2 34.0


3M Vola 11.00 5.65 Exchange rate regime: pegged against EUR at CZK 27


Political interference in

monetary policy is a headwind

for the currency.

Resistance against appreciating

exchange rates.

High outflows due to the

repatriation of profits from

foreign direct investments.

Low external debt level relative

to exports.

Trade surplus and solid fiscal

policy.





2015


Contacts


The Czech economy has a

strong track record of balance-

sheet and price stability.

CZK: END TO CURRENCY CAP IS NEARINGThe exchange rate floor of EUR/CZK 27 becomes increasingly unsustainable and unnecessary. We expect the

floor to end soon and hold a bullish view.




Pressure to end the currency floor of EUR/CZK 27 is rising on the back of strong growth in currency

reserves, domestic liquidity, credit activity and real estate prices.

The imported loose monetary policy stance via the floor is in stark contrast to the healthy growth

backdrop and threatens to overheat the economy.

Speculation on lifting the EUR/CZK currency floor is well under way, with forward rates discounting a

stronger Czech koruna.


16

18

20

22

24

26

28

10 11 12 13 14 15 16 17 18

16

18

20

22

24

26

28

USD/CZK USD/CZK

Standard deviation Fair Value*USD/CZK Spot, Forecast

22

24

26

28

30

32

34

10 11 12 13 14 15 16 17 18

22

24

26

28

30

32

34

EUR/CZK EUR/CZK


EUR/CZK Spot, Forecast

-6

-4

-2

0

2

4

6

8

10

05 06 07 08 09 10 11 12 13 14 15 16 17

-6

-4

-2

0

2

4

6

8

10

% of GDP % of GDP

Trade FDI CA Basic

19/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDHUF 288.3 298.1 294.4


●EURHUF 307.9 319.0 315.0


GBPHUF 359.4 358.4 342.4


CHFHUF 288.0 298.1 294.4



Market backdrop Economic fundamentals Hungary



10Y Yield 3.29% 88bp 296bp Consumer Price Inflation (CPI, %) -0.1 0.4 2.5 Budget balance (% of GDP) -1.6 -0.6 -2.0

3M Fwrd 287.36 308.26 MNB Base Rate (%, end of period) 1.35 Gross public debt (% of GDP) 74.7 71.3 73.5




The central bank has a dovish

bias.





2015

Monetary policy framework: inflation targeting (3% y/y)

Contacts


Some external indebtedness.

HUF: UNCONVENTIONAL POLICY EASING IS A HEADWINDHungary’s National Bank pushes ahead with more unconventional policy loosening – a headwind for the

currency. We stick to our bearish stance in line with consensus.




Government interference in

central bank policy.

Core inflation still signals solid

price stability.

Solid current-account surplus.

Strong exports suggest that

Hungary can easily live with a

stronger currency.

Disagreement between Hungary and the EU about the refugee issue burdens sentiment and appetite for

foreign investments.

Despite inflation picking up, the National Bank of Hungary continues to signal more easing ahead.

Monetary policy divergence among the Fed and a less dovish European Central Bank (ECB) and central

banks from Poland and Czech Republic is a headwind for the forint.

A solid trade surplus helps limit the forint downside.


160

180

200

220

240

260

280

300

320

10 11 12 13 14 15 16 17 18

160

180

200

220

240

260

280

300

320

USD/HUF USD/HUF

Standard deviation Fair Value*USD/HUF Spot, Forecast

250

260

270

280

290

300

310

320

10 11 12 13 14 15 16 17 18

250

260

270

280

290

300

310

320

EUR/HUF EUR/HUF


EUR/HUF Spot, Forecast

-10

-5

0

5

10

05 06 07 08 09 10 11 12 13 14 15 16 17

-10

-5

0

5

10

% of GDP % of GDP

Trade FDI CA Basic

20/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDPLN 3.97 4.02 4.11


EURPLN 4.24 4.30 4.40


GBPPLN 4.94 4.83 4.78

Consensus 4.98 4.95

CHFPLN 3.96 4.02 4.11

Consensus 4.06 4.00


Market backdrop Economic fundamentals Poland


3M Rate 1.63% 48bp 196bp Gross Domestic Product (GDP, %) 3.9 2.8 3.0 CA balance (% of GDP) -0.6 -0.5 0.0

10Y Yield 3.49% 108bp 316bp Consumer Price Inflation (CPI, %) -0.9 -0.6 1.5 Budget balance (% of GDP) -2.6 -2.3 -2.9

3M Fwrd 3.97 4.26 NBP Rate (%, end of period) 1.50 Gross public debt (% of GDP) 52.8 53.9 53.1








2015


y/y)

Contacts


Populist fiscal policy.

PLN: GROWTH PICKS UP DESPITE POLICY SKIRMISHWe maintain a neutral stance and upgrade our short-term forecast as indicators for economic growth pick up,

reducing the headwind from monetary policy for the zloty.




Solid price-stability backdrop.

Improving balance-of-payments

situation thanks to a trade

surplus.

Yield and interest-rate

advantage.

Rate cuts are still on the central

bank's agenda.

Sizeable foreign indebtedness in

Swiss francs.

The Polish economy continues to profit from robust consumption and industrial activity.

Softening wage growth and stronger economic activity help stabilise profitability as a tailwind for the

currency.

The PLN is fairly valued against the EUR and close to fair value on a trade-weighted basis, preventing us

from forming a strong conviction in either direction.


2.6

3.1

3.6

4.1

10 11 12 13 14 15 16 17 18

2.6

3.1

3.6

4.1

USD/PLN USD/PLN

Standard deviation Fair Value*USD/PLN Spot, Forecast

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

10 11 12 13 14 15 16 17 18

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

EUR/PLN EUR/PLN


EUR/PLN Spot, Forecast

-8

-6

-4

-2

0

2

4

6

06 07 08 09 10 11 12 13 14 15 16 17

-8

-6

-4

-2

0

2

4

6

% of GDP % of GDP

Trade FDI C/A Basic

21/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDRUB 56.3 58.5 64.0


EURRUB 60.1 62.6 68.5

Consensus 63.0 63.1

●GBPRUB 70.2 70.3 74.4

Consensus 72.5 72.5

CHFRUB 56.3 58.5 64.0

Consensus 59.1 58.6


Market backdrop Economic fundamentals Russia


3M Rate 10.21% 906bp 1054bp Gross Domestic Product (GDP, %) -2.8 -0.2 0.5 CA balance (% of GDP) 5.4 1.9 4.2


3M Fwrd 57.50 61.69 CBR Refi. Rate (%, end of period) 11.00 Gross public debt (% of GDP) 10.1 10.9 12.1


3M Vola 12.60 13.00 Exchange rate regime: fixed peg (composite)


RUB: CARRY ME HOMEWe acknowledge some improvements in fundamentals and like the attractive carry. We hold our neutral view

but are more cautious as tailwinds might fade.




Tailwinds from higher oil prices, an improving economic outlook and speculations over a closer

relationship with the US are gradually receding.

At current levels, the RUB is no bargain but 10% carry provide plenty of cushion for possible shortfalls.

The RUB remains a highly event-driven and volatile currency; however, it will be less affected by US dollar

strength than other emerging market currencies as oil companies keep US dollars flowing in.

The currency is backed by

decent current-account

surpluses.

Higher oil prices should play out

positively for the RUB.

2015

Contacts

The RUB offers an attractive

carry.


bla

High inflation erodes the value

of the RUB.

Russia’s downgrade to junk bond

status aggravates capital flight

risk.

The Russian central bank can

intervene pragmatically in the

currency market.





Monetary policy framework: inflation targeting ( 5% in

2014)


-2

0

2

4

6

8

10

12

14

16

06 07 08 09 10 11 12 13 14 15 16 17

-2

0

2

4

6

8

10

12

14

16

% of GDP % of GDP

Trade FDI CA Basic

20

30

40

50

60

70

80

90

10 11 12 13 14 15 16 17 18

20

30

40

50

60

70

80

90

USD/RUB USD/RUB

Standard deviation Fair Value*USD/RUB Spot, Forecast

30

40

50

60

7080

90

100

110

10 11 12 13 14 15 16 17 18

30

40

50

60

7080

90

100

110

EUR/RUB EUR/RUB


EUR/RUB Spot, Forecast

22/27



●

●

●


●

●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDTRY 3.63 3.85 4.15


EURTRY 3.90 4.12 4.44


GBPTRY 4.52 4.63 4.83

Consensus 4.55 4.68

CHFTRY 3.63 3.85 4.15

Consensus 3.71 3.78


Market backdrop Economic fundamentals Turkey




3M Fwrd 3.74 4.01 CBRT O/N Rate (%, end of period) 7.50 Gross public debt (% of GDP) 29.0 29.8 33.3




Economic growth faces threats

from low domestic savings, large

existing debt and weaker policy

support.




2015


Contacts



bla

The lira remains prone to acute

external imbalances.

The lira offers an attractive

interest-rate carry.

High inflation erodes the value

of the lira.

A weaker currency improves the

trade deficits via weaker

exports.

Profitability of companies show

signs of improvement despite

challenging domestic backdrop.

TRY: POLITICAL RISKS INTENSIFYMonetary tightening has stabilised the lira so far, but political risks and deteriorating fundamentals point to

another upcoming currency slump. We hold our bearish below consensus view despite an attractive carry.




The currency has been fairly stable under the given circumstances; however, with president Erdogan

likely to receive totalitarian power in April investors' confidence may take a serious blow.

Economic indicators have fallen in recent months and with the hands of the central bank tied to the

government, the case for the lira has become less conclusive.

The lira is one of the most vulnerable emerging market currencies when it comes to growing bets for rate

increases by the US Fed, leading to a stronger USD and higher borrowing costs.


-10

-8

-6

-4

-2

0

2

4

6

05 06 07 08 09 10 11 12 13 14 15 16 17

-10

-8

-6

-4

-2

0

2

4

6

% of GDP % of GDP

Trade FDI CA Basic

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

10 11 12 13 14 15 16 17 18

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

USD/TRY USD/TRY

Standard deviation Fair Value*USD/TRY Spot, Forecast

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

10 11 12 13 14 15 16 17 18

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

EUR/TRY EUR/TRY


EUR/TRY Spot, Forecast

23/27



●

●

●


●

●




● 31.3.17 +3M (Jul 17) +1Y (Apr 18)

USDZAR 13.3 13.7 14.0

Consensus 13.5 13.8

●EURZAR 14.2 14.7 15.0

Consensus 14.2 14.5

●GBPZAR 16.6 16.5 16.3

Consensus 16.3 16.7

CHFZAR 13.3 13.7 14.0

Consensus 13.3 13.5


Market backdrop Economic fundamentals South Africa




3M Fwrd 13.53 14.52 SARB Repo Rate (%, end of period) 6.3 Gross public debt (% of GDP) 49.8 51.8 51.6








2015

Monetary policy framework: inflation targeting (3-6%)

Contacts


ZAR: HEAVY BURDEN FROM POLITICS Political worries become a burden for the currency again. Improved fundamentals and reasonable carry still

justify a neutral view against a bearish consensus.




Firing of Finance Minister Pravin Gordhan raised concerns about the country’s fiscal path and its

investment-grade credit rating.

Leading indicator points to some improvement of the growth backdrop but it is rather the global risk-on

environment and the attractive carry supporting the currency.

Monetary policy outside of South Africa, especially Fed policy, is going to be a key factor in influencing

forex markets and the ZAR is likely to be rather vulnerable.

South Africa may lose its

investment-grade sovereign

rating.

Return of global risk appetite

and search for yield create

support.

The nominal carry is appealing.

High interest rates are a risk for

the growth outlook, which could

trigger money outflows.

Domestic policy is not investor-

friendly.


-8

-6

-4

-2

0

2

4

6

05 06 07 08 09 10 11 12 13 14 15 16 17

-8

-6

-4

-2

0

2

4

6

% of GDP % of GDP

Trade FDI CA Basic

6

8

10

12

14

16

18

10 11 12 13 14 15 16 17 18

6

8

10

12

14

16

18

USD/ZAR USD/ZAR

Standard deviation Fair Value*USD/ZAR Spot, Forecast

9101112131415161718192021

10 11 12 13 14 15 16 17 18

9101112131415161718192021

EUR/ZAR EUR/ZAR


EUR/ZAR Spot, Forecast

24/27

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IMPRINT Authors Janwillem Acket, Chief Economist, [email protected] 1) David Kohl, Chief Currency Strategist, [email protected] 2) David A. Meier, Macro Research, [email protected] 1) Susan Joho, Macro Research, [email protected] 1) Stephanie Lindeck, Macro Research, [email protected] 2) Alejandro Hardziej, Fixed Income Research, [email protected] 1) 1) This analyst is employed by Bank Julius Baer & Co. Ltd., Zurich, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA). 2) This analyst is employed by Bank Julius Bär Europe AG, which is authorised and regulated by the German Federal Supervisory Authority (BaFin).

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