Currency Strategy September 2021 - SEB Research
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Research Reports
Currency Strategy
September 2021Contents
4 Forecasts
5 Trade ideas
6 FX market overview
10 EUR/USD
12 USD/JPY
14 EUR/GBP
16 EUR/CHF
18 EUR/SEK
20 EUR/NOK
22 USD/CNY
24 USD/RUB
26 FX market themes
27 AUD, NZD & CAD: Central Bank expectations
29 Fed and US Outlook
31 Seasonality
33 Contacts
34 Disclaimer
Currency Strategy September 2021 — 3FX forecasts
FX forecasts
Fwd Consensus* SEB vs
16 Sep Q4 Q1 22 Q3 22 Q4 22 12M Q4 consensus
EUR/USD 1.18 1.16 1.15 1.14 1.13 1.19 1.18 -1.7%
EUR/JPY 129 129 129 129 128 129 130 -0.8%
EUR/GBP 0.85 0.84 0.83 0.82 0.81 0.86 0.85 -1.1%
EUR/CHF 1.09 1.10 1.11 1.12 1.13 1.09 1.09 0.9%
EUR/SEK 10.14 10.10 10.00 9.93 9.90 10.19 10.10 0.0%
EUR/NOK 10.11 10.00 10.10 10.08 10.05 10.25 10.12 -1.2%
USD/SEK 8.62 8.71 8.70 8.71 8.76 8.59 8.56 1.7%
USD/NOK 8.59 8.62 8.78 8.84 8.89 8.64 8.58 0.5%
GBP/USD 1.38 1.38 1.39 1.39 1.40 1.38 1.39 -0.7%
USD/CAD 1.26 1.24 1.24 1.22 1.21 1.26 1.24 0.0%
USD/CHF 0.92 0.95 0.97 0.98 1.00 0.92 0.92 2.6%
AUD/USD 0.73 0.77 0.78 0.78 0.78 0.73 0.75 2.6%
NZD/USD 0.71 0.72 0.73 0.74 0.74 0.70 0.71 1.4%
USD/JPY 109 111 112 113 113 109 110 0.9%
GBP/SEK 11.92 12.02 12.05 12.11 12.22 11.88 11.90 1.1%
JPY/SEK 7.88 7.84 7.76 7.71 7.75 7.88 7.78 0.8%
CHF/SEK 9.32 9.18 9.01 8.87 8.76 9.38 9.27 -0.9%
NOK/SEK 1.00 1.01 0.99 0.99 0.99 0.99 1.00 1.2%
EUR/PLN 4.58 4.46 4.35 4.20 4.20 4.62 4.46 0.0%
USD/CNY 6.45 6.40 6.38 6.33 6.30 6.62 6.45 -0.8%
USD/RUB 72.4 72.0 71.0 74.0 75.0 77.3 72.0 0.0%
USD/TRY 8.46 8.85 9.20 9.70 10.00 10.05 8.84 0.1%
4 — Currency Strategy September 2021Trade ideas
How to trade it
Short EUR/USD. FX markets are forgiving when it comes to treating
and evaluating the twin deficits that the US is carrying. Large fiscal
and monetary policy stimulus has instead been rewarded as the
country is expected to soon close labour markets gaps and the Fed
to start to normalize monetary policy soon. The road to a slightly
stronger USD is not straightforward however: we see risks for US
consumption this autumn and risk appetite may weaken which may
or may not be USD positive depending on the repricing of Fed
expectations. The speculative market is long USD and we think this
is a good sign and trigger for expecting a cautiously stronger USD.
Also, Europe remains in the doldrums as regards economic growth
and the ECB is far from taking a step back towards normal monetary
policy. Without Fed action USD is going to weaken so this is the
biggest risk being constructive on the greenback. We target 1.14
The FX market is struck by a low volatility regime and would stop this trade on a daily close above 1.1970.
and range trading environment, making convincing
directional calls harder than usual. We have looked Short EUR/GBP. In Currency Strategy January we expected
EUR/GBP to head lower which turned out correct and in June we
at relative monetary policy developments and recommended a range trade that also delivered. This time we once
valuation to come up with a few different ideas we gain believe in the downside as BOE seems ready to first stop its
think is worth exploring. APF program ahead of time and then hike in May 2022. As the
market has rewarded currencies with central bank support, we
expect EUR/GBP to resume a clearer trend lower targeting 0.83 and
would stop the trade on a break above July highs at 0.8650.
Long AUD/CHF. The SNB is clear on preventing the EUR/CHF from
falling much below 1.07 and this floor has been raised from
previously 1.05. FX reserves have continued to increase which is
clear sign of continued central bank intervention. The problem for
the SNB however is the underlying developments which remain
very favorable for the swiss franc: unit labour cost developments
outperform euroland, the current account surplus is large and
growing and out fair value model is indicative of rising level of
equilibrium for the CHF. Hence, we don’t think EUR/CHF will move
much above 1.10 – but we see a small upside in EUR/CHF. The AUD
is significantly undervalued according to our long-term fair value
model. The AUD has suffered more than what we think is validated
by domestic economic developments but may instead be down to
Chinese cyclical slowdown likely to fade soon. Positioning also
seems unsustainably bearish AUD and is ripe for normalization that
would support the AUD. We are looking for a relatively substantial
upside in this cross targeting 0.77 longer-term.
Range bet EUR/SEK. SEK is stuck between different factors: 1) the
stronger USD is limiting downside in EUR/SEK; 2) the Riksbank
remains a SEK 5bn seller/month and; 3) valuation is not very
appealing anymore and; 4) Sweden seems to invest abroad on the
expense of domestic assets. Then there are a few positives: 1)
there is short-term a strong pipeline of Swedish IPOs which may
attract foreign capital; 2) equity markets are valued at historical
highs and weaker risk appetite could push flows back to Sweden
and; 3) the AP7 investigation of their investment mandate is
expected to come out with a recommendation to FX hedge parts of
the SEK 700bn + large foreign held portfolio. We see EUR/SEK
falling in the coming weeks before lifting ever so slightly going into
year-end. Hence, we remain buyers of range-bets with the caveats
of vols already being very low.
Currency Strategy September 2021 — 5FX market overview
Central Banks are still in the driving seat when it comes to
currencies and Federal Reserve is the boss. During summer
there has also been a close relationship between currencies and
risk appetite. But risk appetite has in turn been closely
correlated to US interest rates indicative of Fed expectations
driving the direction of FX markets. Room for monetary policy
normalisation remains the prime FX driver. We expect the dollar
to grind higher supported by Fed tapering in Q4. EUR/GBP is now
expected to continue to fall as the BOE reduce monetary
accommodation in Q2 2022. EUR/SEK and EUR/NOK remain on
a trajectory lower, but the pace is very slow. The AUD finally has
an attractive valuation favouring longs.
The big picture: The year so far has been split into their rate decision mid-June when the dot plots
basically two different regimes pushing most indicated a rate hike much earlier than previously
currencies in opposite directions. Initially the focus was anticipated. This had a large impact on currencies
on Fed tapering talks and its closest gauge, the US 10- during the summer where decreasing risk appetite and
year yield, was the key driver for the FX market. In weaker liquidity caused some large moves where safe
February and March heightened tapering expectations haven currencies strengthened while risk sensitive
pushed the yield higher and currencies which could be currencie weakened.
expected to have central banks with room to relatively
soon normalize policy rates strengthened. CAD with the
BOC deciding to taper during the spring and move
closer in time the first expected hike, followed by the
USD supported by the tapering talks, the GBP which
might have had more to do with Brexit risk premia
being reduced and quick vaccination, and finally the
NOK which got heavy support from rate hike
expectations when Norges Bank implied hikes already
in the autumn. In the other spectra were currencies like
the CHF, SEK and JPY where rates are low and little is
expected to change anytime soon.
Three currencies stand out in this context: (1) USD
which managed to strengthen in both scenarios, (2)
SEK which managed to weaken in both scenarios, and
(3) GBP which also gained in both scenarios showing
that its drivers were a bit different from the rest of the
G10 currencies. The relationship for USD and SEK have
some bearing on what to expect in Q4 where the dollar
has a chance to appreciate if: 1) Fed delays tapering as
this could trigger another risk-off mood and USDs safe
haven qualities would be supportive and; 2) if they do
taper as we expect then the USD may strengthen on
rising interest rates. The opposite could be true and a
This was followed by a correction in April as the Fed threat to the SEK although developments in August and
managed to convince the market that they were rather September shows a more symmetrical reaction
relaxed about e.g. high inflation as it was deemed only function in both USD and SEK.
transitory and that they would accept it above target
for a longer period as it had been below for such a long During most of the summer we have seen that many of
time. In May most of the correction had been done and the G10 currencies have correlated well with our broad
the 10y yield was moving sideways and risk appetite risk appetite index but as the larger changes of the risk
rather governed shorter moves in currencies which index itself has been in close connection with the
changed rapidly as the Fed surprised the market at development of the US 2y rate in turn driven by Fed
6 — Currency Strategy September 2021FX market overview
expectations it is clear that the most important driver at following the Covid-19 outbreak in March 2020, FX
the moment is market expectations on the Fed. volatilities have been on an almost one-way decline.
Current levels are close to historical lows indicating
Without Fed, risk appetite is the FX driver that the risk for a push higher is not that unlikely.
Whenever there are no clear changes to Fed
expectations, the FX market is then dictated by
temporary swings in risk appetite. When there have
been cases where increased expectations of tapering
and even more so rate hikes from other central banks it
has greatly supported their currencies. Already
mentioned this supported the CAD and the NOK in
spring and during summer the NZD which however
gave heavily back when RBNZ decided to leave its rate
unchanged at its August meeting following a new
lockdown only days before their meeting.
A Taylor rule suggests monetary policy is
key for FX
What could cause higher volatility going forward? The
To empirically, i.e. by use of historical data, investigate
most probable cause would be diverging central bank
drivers of the currency market in 2021 we have
policy action. Current policies of large stimulus from
compared the year-to-date G10 changes with the
fiscal and monetary policy work against expecting a
spread of current G10 central bank rates to what a
return higher in implied volatilities any time soon.
Taylor rule stipulate as the optimal policy rate. The
spread, which is what we in the beginning of the text FX exposure amongst speculative accounts fell
referred to as room for normalizing rates, explains heavily as the Covid-19 pandemic hit in early spring
almost 50% of the yearly change for the G10 2020 and risk aversion struck the FX market. Not really
currencies. Clearly supporting our notion that this has a surprising development but what has been more
been a key FX driver. surprising is the weak and slow recovery in FX
exposure (measured as the sum of speculators held
FX change vs Taylor rule spread long and short contracts in all G8 currencies) compared
5 to other risky asset such as equities. Speculators FX
4 GBP exposure has corrected just about half of the sharp
CAD
3
USD drop which took place when Covid-19 hit the market in
2
NZD NOK March 2020. Low exposure usually leads to low
FX YTD (%)
1
general volatility but with sharp spikes when there are
0
y = -0.97x - 3.67 events. The question is when, or rather if, the currency
-1
R² = 0.48 EUR
CHF exposure can continue to grow enough for it to
-2 AUD
-3 SEK facilitate higher general volatility again.
-4
JPY
-5
-8.00 -6.00 -4.00 -2.00 0.00
Spread to Taylor rule
This relatively simple analysis also provides insight into
the currencies which have had other significant drivers.
NOK and NZD trading well above the Taylor rule
implication which tells us that they have appreciated
more than what is motivated by the room for policy rate
normalization. The reason here we believe is that the
central banks behind these two currencies were
expected to hike their respective rate well before the
others (RBNZ in August and Norges Bank next week in
September) i.e. not only the room for normalization but Positioning is USD bullish now
also the timing matter as we explained above. In a Positioning, based on CFTC’s commitment of traders’
similar manner the slight underperformance compared weekly report, does not resemble the year-to-date
to what the Taylor rule implicates for EUR, CHF and the performance as it did when we released the prior
JPY are probably a result of low/no prospects for a hike Currency Strategy report. However, it neither
from the respective central banks. The resembles the development since the Fed mid-June
underperformance of the AUD is less explainable using meeting. What it does say is that the aggregated USD
this analysis and suggests there is clear room for position is far more USD bullish compared to the past
appreciation for the aussie. 52 weeks and that these long USD positions have
mostly been taken versus the AUD, EUR and NZD. Thus,
Volatilities are record-low: After very brief but
these currencies should be extra sensitive for swings in
surprisingly muted spike higher in FX volatility
Currency Strategy September 2021 — 7FX market overview
the markets view on the Fed – something that has been
clear when it comes to price moves lately.
Systematic trend-followers like CTAs have, according
to our replicating model, continued to scale back on
short USD positions and have even since late summer
on average switched to a long USD position. Also, worth
noting is that in June the USD position had shown a very
tight relationship with the US 10-year yield which after
summer is gone but replaced by a tight relationship
with the US 2-year rate (especially since early August)
i.e. back to a more common driver for currencies. Their
current position is long GBP, NZD, CAD and NOK versus
USD while being short CHF, AUD, EUR and the JPY. In
other words they are generally positioned for risk
appetite to increase.
Systematic trend-followers USD exposure vs US rate
Seasonality patterns have seen plenty of disruptions
due to the pandemic but in the autumn, there tend to be
some very robust patterns that still are good to reflect
ont. These are covered at the end of the theme article
Seasonality but some deserves to be mentioned
already here: (1) In October both EUR/NOK and
EUR/SEK have robust patterns for higher levels while
EUR/GBP has built a track-record for moving lower
having fallen in October during the past four years, (2)
in November USD tends to strengthen versus CAD and
JPY, and (3) in December EUR/SEK as well as EUR/CHF
tends to fall.
8 — Currency Strategy September 2021Currencies
Currencies
Currency Strategy September 2021 — 9EUR/USD
EUR/USD
US Equity markets are close to 50% of global equity market
capitalisation, global debt is also close to 50% denominated in USD.
Global FX reserves comprise 60% US dollars and the USD is present
in a majority of daily FX transactions. Clearly the USD is dominating
Delayed tapering but and to call the direction of the Greenback will be instrumental in
making most currency forecasts correct. Historically, the USD has
USD appreciation traded in 7-9 year long cycles where the latest bottom was set in
2011 after the 2008-09 financial crisis. Then, the Fed slowly but
steadily started to normalise monetary policy and move the
economy back towards full employment and inflation near its
target. The euro crisis on the contrary forced the ECB into very
expansionary policy and it was lagging the Fed substantially: from
2015 the USD really started to outperform the EUR on strong US
growth and tightening monetary policy. The top in the USD cycle
Implied and realised EUR/USD volatility is close to a came last year during the outburst of the pandemic when the real
record low and the most traded currency pair is effective trade-weighted USD reached a 35-year high (depending
stuck in a relatively tight range. The market on which index you look at; see BIS REER index graph below). So, if
continues to overlook the underlying, negative USD history is a guide, we would be looking at another 5-8 years of USD
fundamentals and is instead attracted to strong US decline. The market, however, is clearly overlooking the negative
fundamentals that the US has when it comes to its currency (more
equity returns and monetary policy that will become below) and the main reason is the same as in the last upturn when
relatively less expansionary. As long as the Fed is the US was (much) quicker in pursuing policies that would
delivering tapering and eventually rate hikes, the ultimately take the country back to full resource utilisation. And it
USD strengthen gradually, but disappointments looks much more likely today also given the fact that Europe and the
would surely push the cross above 1.20 again. euro is stuck for much longer with weak growth, low inflation, and
monetary policy at the lower nominal boundary.
US growth outlook strong, but risks for consumption
During the first half of 2021, the US economy grew at an annualised
rate of more than 6%, bringing the economy back to the pre-
pandemic level of 2019. Several forces now suggest that the pace
of recovery will slow: higher virus transmission, supply-side
restrictions, falling fiscal stimulus and higher inflation, which erodes
household purchasing power. We have trimmed our growth forecast
for 2021 from 6.5% to 6.0%, followed by 4.2% in 2022. The virus
transmission is troublesome, but national mobility data have not yet
been greatly affected. A big problem for economic growth is large-
scale supply-side restrictions in both production and the labour
market, as well as the sometimes difficult adjustments back to a
more normal economy. The massive cash payments to households
early in 2021 were accompanied by disrupted production chains
and shortages of components, especially semiconductors. A
worsening pandemic, mainly in parts of Asia, is contributing to
uncertainty. In the service sector, the situation has deteriorated,
and the labour market is showing overheating tendencies, but
several factors still indicate that the economy has not yet hit any
ceiling. Employment still has a long way to go before reaching pre-
pandemic levels and its earlier trend.
Household consumption has been the main engine of the recovery,
but it is now facing resistance from reduced real incomes and the
saturation of needs after an earlier shopping spree. According to the
16 sep 1M Q4 21 Q1 22 Q4 22 LTFV* University of Michigan, the August decline in consumer confidence
EUR/USD 1.18 1.17 1.16 1.15 1.13 1.21 was one of the most dramatic in the history of its index series. The
EUR/SEK 10.15 10.05 10.10 10.00 9.90 9.64
index is now below its lowest level early in the pandemic and is
EUR/NOK 10.13 10.10 10.00 10.10 10.05 9.56
probably being depressed by concerns about the Delta variant and
USD/SEK 8.62 8.59 8.71 8.70 8.76 8.00
USD/NOK 8.60 8.63 8.62 8.78 8.89 7.93
higher inflation expectations. Looking ahead, we expect the
*Based on the SEB LTFV model situation to improve in these respects, but the decline in the
confidence index still supports a forecast of subdued future
consumption.
10 — Currency Strategy September 2021EUR/USD
Fed tapering decision delayed due to weak Payrolls?
The discussion about “tapering” the Fed's monthly bond purchases
from today’s USD 120 billion/month gained momentum at the July
policy meeting, but the disappointing non-farm payroll in August is
making us expect a tapering announcement at the November Fed
meeting. The Fed has pledged to announce any policy change well in
advance and in December, we believe it will begin to lower
purchases by SEK 15 billion per policy meeting, which means they
will end during Q3 2022. After the last "tapering period", the Fed
waited over a year to hike its key interest rate. We believe it will
move faster this time, delivering the first hike in Q1 2023
Deficits are USD negative, but not in play as long as Fed tightens
The financial crisis in 2008-09 was followed by concerns about
elevated debt levels and chronic current account imbalances. Today
the market is not worried, and on the contrary is rewarding
countries like the US that promote growth-oriented policies. The
current account deficit has accelerated as we expected given
surging domestic growth, but the level is “only” about 3-4%/GDP on
an annualised basis. The continued strong surge in US equity
markets has more than financed the C/A deficit looking at 2020
developments. Going forward it is less clear how capital flows are
going to develop. The US will continue to provide good growth
momentum, but expectations regarding future returns in the equity
markets should be slim. Hence, there is a risk that equity flows are
not going provide the USD the support that it seems to have been
given previously.
USD positioning is indicative of speculative accounts building
longs
The trend with positive USD sentiment among CTAs which begun at
the turn of the year has continued with the average USD position
reaching a 15-month record large long USD position on 20 August.
Since then, it has dropped slightly and topped off along with the
increasing risk appetite. USD positioning among CTAs is now
neutral. In the FX exposure of USD, we have seen a decrease in
short USD contracts, which are now at the lowest level since July
2020. Long USD contracts have continued to increase since June
and are soon approaching pre-Covid levels. USD positioning for
leveraged funds and financial institutions reflects changes between
25 August and 31 August, a period when the EUR/USD rose by
0.4% and the USD index lost 0.3%. For both leveraged funds and
speculators, the positioning deviates about two standard deviations
from the norm towards long positioning (i.e. there have been more
long USD positioning than usual lately).
Long-term valuation: USD improvement likely to fade again
Our long-term fair value estimate has come down following higher
real interest rates in Q1, but the decline again in Q2 is likely to put
some upward pressure on the fair value again. The spot rate at
around 1.20 seems to be well in line with fundamentals. We believe
relative monetary policy will be the major driver for the pair over
coming years and that the Fed is likely to tighten policy much earlier
than the ECB, lending support to the dollar in 2022.
Currency Strategy September 2021 — 11USD/JPY
USD/JPY
The yen has been the second-best performing currency against the
dollar in the G10 space in Q3, coming in after the NZD. Although the
yen is holding on to 5.6% of year-to-date losses, the pullback in the
US 10-year yield has eased the depreciation pressure on the JPY
Still taking its cue from for now. Even so, we continue to expect USD/JPY to rise towards
111 by end-2021.
US yields Market concerns about global growth, due to the Delta variant,
have led to a deterioration in sentiment
The deepening of downside risks to China’s growth has likewise
benefited the yen across most crosses. However, the Federal
Reserve continues to guide expectations towards a tapering
decision, even as it separates tapering from the decision to raise
interest rates. Despite easing upside pressures in the latest US CPI
Depreciation pressures on the yen eased in the past print, it does not change the narrative for Fed tapering this year.
few months as US yields pulled back. Despite being Thus, assuming continued improvement in the US labour market and
the second-best performing currency in the G10 fading challenges from the Delta variant, we expect a modest rise in
US yields in the near term, with a target of 1.50% for the 10-yield
space in Q3, we believe further downside risk to by end-2021, pulling up USD/JPY with it. Even so, we acknowledge
USD/JPY is limited. Our view is that a modest rise upside risks to our US 10-year yield forecast should there be a
in the US 10-year yield towards 1.50% will pull substantial improvement in sentiment.
USD/JPY up towards 111 by end-2021. At its meeting in July, the Bank of Japan (BOJ) kept its policy
tools steady, as expected
In light of the extended state of emergency for most of the country,
the BOJ has cut its GDP growth forecast for fiscal year 2021, to
3.8%, while bumping up the outlook for next year to 2.7%.
Meanwhile, the rise in commodity prices pushed up the central
bank’s inflation outlook to 0.6% for FY 2021 and 0.9% in FY 2022.
Even with the revision in inflation expectations, the supply-driven
change in forecasts suggests that the central bank has yet to make
a dent in its aim to raise inflation in a sustained manner. This will
keep BOJ’s policy supportive in the foreseeable future, we believe.
Central bank provides details on its green lending programme
The BOJ announced that it will be applying 0% interest in its green
back-financing scheme, coming up short of paying a preferential
rate to banks to prop up green lending. It has also announced its
intention to allocate some of the central bank’s foreign asset
holdings in foreign currency denominated green bonds. The BOJ’s
cautious approach towards green finance indicates that the focus
clearly remains on providing support to the economy through the
pandemic.
Fresh political uncertainty propped up demand for the yen
In early September, Prime Minister Yoshihide Suga announced his
intention to resign as leader of the ruling party, effectively stepping
aside when his term ends at the end of Q3. Before the
announcement, Prime Minister Suga was working on yet another
fiscal stimulus package. While the party election is still a few weeks
16 sep 1M Q4 21 Q1 22 Q4 22 LTFV* away, the entry of a new leader is raising the prospect of a more
USD/JPY 109 111 111 112 113 90 active policy debate on the economy’s long-run growth drivers.
EUR/JPY 129 129 129 129 128 109
Even so, the likelihood of a substantial policy adjustment is low, in
JPY/SEK 7.88 7.77 7.84 7.76 7.75 8.89
JPY/NOK 7.87 7.81 7.77 7.84 7.87 8.81
our view. Historically, a dissolution of the parliament is supportive
*Based on the SEB LTFV model
for Japanese assets and the yen. Moreover, the market is hopeful
that a new government would be more open to an eventual lifting of
the state of emergency, considering the recent downtrend in COVID
cases. Whoever becomes the new Prime Minister will have to
sustain an economic recovery while containing the pandemic.
12 — Currency Strategy September 2021USD/JPY
G10 Currencies vs JPY The Bank of Japan’s downward revision to its GDP growth
outlook reflects the challenges exacerbated by the pandemic
AUD/JPY 0.9
The Covid containment strategy is dampening the service sector,
SEK/JPY 1.4
specifically retail, transportation and delivery services. The lower
CHF/JPY 2.1
than expected recovery in the machine orders July print suggest
EUR/JPY 2.5 that the resilience of the manufacturing sector has not been enough
NZD/JPY 4.8 to offset the weakness in the non-manufacturing sector. This
NOK/JPY 5.6 reflects the divergence between strong external demand and weak
USD/JPY 6.0 domestic activity. Overall, this suggests that Q3 growth in private
CAD/JPY 6.4 capex will pull back.
GBP/JPY 7.2
Even with the larger than expected revision in Q2 GDP, the
0.0 2.0 4.0 6.0 8.0
outlook for the current quarter remains challenging
% Change YTD Weak private consumption will likely be the culprit. Even the
external sector is facing fresh downside risks, due to the slowdown
in China’s domestic demand. This will require further fiscal stimulus
to reduce downside risks to growth towards 2022.
Despite the extension of the restrictions, mobility indicators
have started to improve
The state of emergency, which broadly covers around 70% of the
country, has been extended yet again until the end of September.
However, daily new Covid-19 caseloads continue to trend lower.
The vaccination rate has picked up, with 52.3% of the population
now fully inoculated. This has allowed the government to relax
some of the restrictions required by the state of emergency.
The current account surplus continues to widen with the uptrend
in the trade surplus
As of July, we estimate the current account surplus reached 3.9%
of GDP, from 3.3% at the end of 2020. Exports remain the bulwark
of the economy amid lingering local restrictions. Export volumes
remain elevated, posting highs last seen in October 2018. Exports
of steel, semiconductor products and chip-making equipment to
Asia remain strong, followed by robust European demand for auto
parts and steel.
Long-term valuation. The JPY has been undervalued against the
USD for several years since the JPY depreciated in 2013 and 2014.
Long-term fair value according to our approach is around 90 in
USD/JPY today, which is a bit away from where spot is actually
trading. Historically it has not been unusual with the USD/JPY
deviating by more than 20% from the fair value, which means that
today’s value isn’t that remarkable. The exchange rate can though
be somewhat sensible if exposed to any external shock. In recent
years the nominal ULC in Japan has increased which has not been
the case for a long time as the country has suffered from deflation.
Deflation and falling nominal wages have always been supportive
for Japanese competitiveness and therefore it is sensible to expect
a stronger nominal JPY exchange rate over time.
Currency Strategy September 2021— 13EUR/GBP
EUR/GBP
GBP had a good run in H1 2021 as the market left the uncertainty
over Brexit and Covid-19 behind and focused on cheap valuation
and prospects for recovery. The fact that BOE ruled out
implementation of negative rates contributed to GBP being a top
Increasing GBP performer in H1. The fall in EUR/GBP had a short setback when the
US tapering fear waned and the US 10y yield corrected lower in
support from BOE April. In August, EUR/GBP corrected higher where the GBP has
weakened along with other currencies previously having received
support from anticipation on a tighter monetary policy. With
expectations slowly returning for slow exits, we expect EUR/GBP to
resume its trend lower in anticipation of a BOE hike in May 2022.
This will be well supported by BOE stopping its Asset Purchasing
Facility ahead of time already in November which is now our call
ahead of the BOE rate decision 23 September.
GBP had a good run during H1 2021 as markets
clearly left the uncertainty over Brexit and Covid-19 Approaching pre-Covid crisis level
British GDP rose by nearly five percent in the second quarter, thus
behind and focused on cheap valuation and the government’s strategy of opening the economy step by step
prospects for recovery. Now we expect BOE to favoured the domestic economy. Even if the Delta variant of Covid-
cautiously hike its key rate already in May 2022 and 19 is now slowing the return to normal conditions, we still expect
stop its APF program ahead of time in November, GDP to reach the first milestone – a return to its pre-crisis level – by
which should lend GBP further support. Therefore, the end of 2021. In Nordic Outlook, September, we revised our
unemployment forecast significantly lower, even though GDP has
we forecast a new push lower in EUR/GBP targeting mainly increased in line with earlier estimates. Rapid recovery in
0.83 at the end of the year. demand has contributed to rising employment. At the same time,
the labour supply has not recovered in the way we expected after
the downturn during the acute phase of the Covid-19 crisis. We now
believe that the jobless rate will fall below 4 percent as soon as the
end of 2023 – clearly faster than previously expected.
Rising wages but falling inflation
Labour shortages have gradually begun to affect wage formation.
Official data indicate rapidly rising wage pressures, but as with
other statistics, there are major uncertainties related to the
pandemic. The Bank of England's underlying wage metric shows a
calmer trend, which we believe is more relevant as an inflation
indicator. We believe that wage pressures will diminish as
temporary imbalances between supply and demand ease. We
expect inflation to peak at 3.8% at the beginning of 2022 and then
rapidly decline to 2% by mid-year.
The BoE to be GBP supportive
Rising inflation, signs of supply disruptions and a relatively fast GDP
rebound pose challenges for the BoE. This summer, members of the
BoE's Monetary Policy Committee (MPC) have clearly indicated that
the time is approaching to reduce monetary stimulus measures.
Although our growth path and inflation forecast do not give the
impression of the need for faster declining monetary policy stimuli,
we believe the BoE wants to leave behind the very lowest crisis
interest rate and give itself the flexibility to start downsizing its debt
portfolio. This view has been reinforced by the late events within
16 sep 1M Q4 21 Q1 22 Q4 22 LTFV* the BOE with two new members of the MPC of which one is a new
EUR/GBP 0.85 0.84 0.84 0.83 0.81 0.77 chief economist who has openly been critical of QE. We believe that
GBP/USD 1.38 1.39 1.38 1.39 1.40 1.57 the BoE will end its QE program prematurely in November and then
GBP/SEK 11.92 11.96 12.02 12.05 12.22 12.54
cautiously hike its key rate by 0.15 basis points in May 2022 and
GBP/NOK 11.89 12.02 11.90 12.17 12.41 12.43
*Based on the SEB LTFV model
then by 0.25 basis points in early 2023 and again in late 2023. That
would bring the bank rate back to its pre-pandemic level of 0.75
percent. As the market in 2021 has been rewarding currencies
backed by central banks about to step away from their very loose
monetary stimuli, we expect EUR/GBP to resume its trend lower in
anticipation of the BOE hikes. One reason for the late rise in
EUR/GBP was probably due to a larger rate increase in EUR rates
than GBP ones ahead of the ECB rate decision last week, which,
however, turned out to be a bit of a disappointment for markets
after which the EUR/GBP rate spread has resumed a grind lower as
well.
14 — Currency Strategy September 2021EUR/GBP
External deficits remain GBP negative
The UK has long suffered from external deficits primarily driven by
large imports of goods (the UK is a net exporter of services). As is
normal in times of sharp economic contraction, imports decline more
than exports and hence we have seen a temporary improvement in
the trade deficit. This was unlikely to last as the UK recovers from
the worst contraction in 300 years and we can already see a
reacceleration of the deficits in Q1 2021 where the current account
is back at -2-3%/GDP. The impact of the new trade deal with the EU
is hard to estimate but we think that whilst the trade deficit might
be unaffected in the medium term (reduction on both imports and
exports), the service surplus should narrow in light of British service
exporters now trading outside of any deal near-term, at least. Over
the past decade, the primary income has pushed the current
account lower, and the medium-term development very much
depends on the trust in which the UK can bare its debt towards its
trading partners. As regards capital flows, there is clearly an upside
risk as the UK equity market is very cheap and might well attract
from flows as the Brexit uncertainties are cleared. To most portfolio
managers, GBP is also undervalued, making UK equities even
cheaper. This is perhaps the biggest upside for the pound in the
coming 12 months.
GBP is generally still undervalued
The GBP has been undervalued against the euro and most other
G10 currencies since the Brexit referendum in 2016. According to
our long-term fair value model, the equilibrium exchange rate for
the EUR/GBP is 0.78, which, if anything, is a bit flattering for GBP as
this suggests that the GBP is still undervalued by around 5-7% but
debt levels and current account deficits tell another story. When
looking at the real effective exchange rate GBP has traded
sideways, despite nominal weakness as the unit labour cost
development has been weak. Hence, depending on the measure
chosen, it is not obvious GBP is deeply undervalued. Since the Brexit
referendum, the GBP has traded with a risk premium related to the
risk that the UK would leave the EU without a trade deal in place.
Now that we are past this point and the GBP has been one of the top
performing G10 currencies in 2021, it seems the risk premium was
quite significant after all. Though the exact contribution to the late
GBP strength between decreasing risk premia, quick vaccination,
sharp recovery of GDP and the BOE hiking possibilities sooner than
most other G10 currencies, is hard to determine. However, we
believe the slow grind lower in EUR/GBP during the autumn will
mostly be based on BOE hiking expectations. Therefore, the biggest
risk is for these expectations to be put into the future, specifically
for the BOE, based on domestic developments, or in general for
Central Banks, based on the community of Central Banks with the
Fed at the helm.
Currency Strategy September 2021 — 15EUR/CHF
EUR/CHF
In Currency Strategy one year ago, we expected EUR/CHF to
establish a new trading range between 1.08-1.12, which has almost
been right. In November 2020, EUR/SEK rose from 1.07 to 1.11 in
march 2011. Most of this move came in February and March when
Short-term upside the market was concerned about Fed tapering causing the US 10-
year yield to rise sharply and risk appetite to head lower. This
potential development occurred despite falling risk appetite and was
probably due to the market focusing on carry the possibility of
monetary tightening to support currencies an exercise where CHF
and JPY came with the least support. We again expect some upside
in EUR/CHF but then there is little supporting a major move higher
given already elevated risk appetite, improving CHF valuation and a
eurozone in continued economic hardship.
EUR/CHF rose sharply when US tapering concerns Economic recovery as restrictions are eased
were in focus at the beginning of the year, only to The second wave of Covid interrupted the economic recovery at the
turn downwards when taper fears were reduced in beginning of 2021 as tightening of restrictions led to yet another
decline in GDP Q1. However, with a decline of 0.4% the contraction
April and continued sharply lower over the summer was much smaller than during the first Covid wave. Following the
when reduced risk appetite was driving the markets. easing of restrictions in Switzerland and due to economic recovery
However, we believe the cross bottomed in August abroad, Q2 showed strong growth of 1.8% q/q and a record
and should continue to correct higher from the expansion of 7.7% y/y. In June 2021 (before final Q2 GDP was
bottom of its new 1.07-1.11 range, at least until the released) the SNB expected GDP to rise by 3.5% in 2021. Also
indicating a recovering economy is Swiss unemployment, which in
Fed begins to taper. Long-term we expect slightly August inched down to 2.7%, the lowest since February 2020, i.e.
higher EUR/CHF as the CHF remains a bit before the Covid crisis begun.
overvalued.
SNB remains with its low rate and willingness to make FX
interventions
The SNB remains far from reaching its inflation target, and inflation
has been running below target for a very long time. In the latest
monetary policy, the SNB projects inflation to average 0.6% in
2022-2023. Average annual inflation since the financial crisis in
2008/09 has also been close to zero and hence it is fair to say that
the SNB has failed to reach its inflation target, despite massive
expansionary monetary policy initiatives. The strategy has instead
been to “manage” the CHF to prevent it from rising too quickly. The
continued accumulation of FX reserves underlines SNB’s strategy of
running “dual mandates”, i.e. pegging the CHF whilst trying to boost
inflation.
FX Reserves grinding higher
FX reserves rose by almost CHF 100bn during March and April
2020. After that, the SNB seems to have paused FX interventions
until April 2021 when FX reserves begun to increase again, albeit
more gradually. As stated in Currency Strategy last September, the
SNB will continue to intervene in the FX market should the CHF
appreciate again; April 2021 was the first there was a prolonged
CHF appreciation since the previous intervention. Clearly, the SNB
remains on high alert regarding the level of the CHF, which is still
16 sep 1M Q4 21 Q1 22 Q4 22 LTFV*
EUR/CHF 1.09 1.09 1.10 1.11 1.13 1.14 highly overvalued, according to the SNB, and it seems that EUR/CHF
USD/CHF 0.92 0.93 0.95 0.97 1.00 0.95 at 1.07 is the new level sought to protect (where 1.05 was
CHF/SEK 9.32 9.22 9.18 9.01 8.76 8.43 protected back in 2020).
CHF/NOK 9.30 9.27 9.09 9.10 8.89 8.35
GBP/CHF 1.28 1.30 1.31 1.34 1.40 1.49 External surpluses remain
*Based on the SEB LTFV model Covid took a strong toll on the Swiss current account which went
from posting its highest ever surplus in Q4 2019, to only one year
later in Q4 2020, after four straight quarters with a shrinking
surplus, to recording its first gap since Q1 2009. However, the
current account surplus widened again in Q1 2021 (to CHF 15.9bn).
Meanwhile, the Swiss trade surplus is at record levels with both
May and June at CHF 4.3bn and a steadily increasing curve since
around 2019.
16 — Currency Strategy September 2021EUR/CHF
Long term we believe the CHF will have to weaken but that the
long-term target for the EUR/CHF should be somewhat below its
current long-term fair value of 1.15, as the fair value is in a long-
term trend lower. Even if an almost two-year CHF-appreciation
trend was broken in May 2020, the long-term risks are skewed
towards a stronger CHF for a longer period as external surpluses
are maintained. Switzerland was labelled a currency manipulator by
the US in December 2020, something which may not matter much
on face value and did not really have an impact on the CHF, but is
indicative of the rare ability of the country to combine a strong (not
weak) currency with solid external competitiveness.
Long-term valuation
During the financial crisis in 2008/09 and during the euro area debt
crisis in 2010-2012, the CHF served as a ‘safe haven’ currency. It
then attracted vast capital inflows from across the world, which
caused it to appreciate significantly. The valuation situation had
altered quite a lot: the CHF was significantly undervalued against
the EUR between 2003 and 2010, but has since then been
overvalued to different degrees, according to our valuation
approach. Today, our estimate for the equilibrium exchange rate in
the EUR/CHF is around 1.15 which suggests that the EUR/CHF is
trading 5% below fair value. However, fair value is in a steady grind
lower (it was at 1.25 just 5-years ago) which makes it less likely
that a level as high as 1.15 will be reached. It looks a little different
when instead considering the competitiveness of the Swiss
economy based on relative unit labour costs (ULC). After the
financial crisis, the ULC-development in Switzerland was moving
alongside the EUR area ULC. However, since 2011, the situation is
back to normal, which indicates much faster growth in the EUR area
ULC. As EUR/CHF was around 1.04 in 2015, this approach indicates
a largely overvalued CHF, but since then, EUR/CHF has risen
somewhat while the relative ULC-development has fallen
significantly to now indicate that EUR/CHF is trading around or
slightly higher than where it should for the EUR area to maintain its
competitiveness.
Currency Strategy September 2021 — 17EUR/SEK
EUR/SEK
Following strong development last year, the Swedish krona is again
trading on a weaker footing this year. At the start of 2021, we
anticipated a trading range for the EUR/SEK between 10.00 and
10.30, which has played out well thus far. We thought the strong
Have we already seen cyclical undercurrent of resurging global growth etc would promote
a stronger SEK as we moved from Q2 into Q3, but this has yet to
the lows? materialise and instead the cross remains in a fairly tight range. The
overall direction will most likely be governed by US developments
and the direction of the USD. The preference of Swedish institutions,
corporates and households to save and invest abroad is a negative
undercurrent that seems to be a structural negative headwind for
SEK bulls.
Strong recovery…
EUR/SEK trading is correlated to the USD outlook: The Economic Tendency Survey of the National Institute of
a stronger greenback often pushes EUR/SEK Economic Research (NIER) is now at its highest level since the time
series began in 1996. This trend is led by manufacturing, but
higher and vice versa. With the prospect of the service sector confidence rose to cyclical peaks this summer. High
USD staging an earlier comeback than previously future expectations have made the greatest contribution, but
anticipated, we ask whether EUR/SEK has already companies are also reporting a strong current trend. This is
bottomed out in this cycle. EUR/SEK challenging confirmed by hard data. For example, industrial production and
10.00 and breaking below that level has become merchandise exports have risen well above their early-2020 levels.
GDP is already above its pre-pandemic level and GDP growth in Q2
harder now. 2021 came in a full percentage point higher than our Nordic Outlook
May forecast. The continued significant potential for a recovery in
household consumption and service exports also points to
accelerating growth during the second half of 2021. The recovery
will have a strong impact on the labour market. We have adjusted
our GDP growth forecast for 2021 to 4.6% from 4.5% in May and
we target 3.9% expansion in 2022. Sustained low interest rates
and an expansionary 2022 election budget will continue to provide
stimulus.
…but Riksbank remains firmly on hold
Core inflation (CPIF excl. energy) fell in July to 0.5%, the lowest
level since 2014. This can be explained by base effects from
unusually high summer 2020 prices and a downward adjustment in
the weighting of foreign travel, but these effects should disappear
over the next few months, while more underlying forces will help lift
inflation from low levels. We expect an increase in core inflation to
1.6-1.7% in the first half of 2022, followed by a decline when
international price pressures ease. Due to sharply rising electricity
prices, CPIF inflation should exceed 2% this autumn. However,
forward prices for electricity clearly point to a decline in 2022.
Having unveiled new expansionary measures throughout 2021, the
Riksbank has not signalled any changes at this year's three policy
meetings. Bond purchases – boosted to a total of SEK 700 billion in
November 2020 – will continue as planned this year. The Riksbank
estimates that its 2022 purchases will be roughly equivalent to the
16 sep 1M Q4 21 Q1 22 Q4 22 LTFV*
volume of maturing bonds. The Board continues to signal an
EUR/SEK 10.15 10.05 10.10 10.00 9.90 9.64
USD/SEK 8.62 8.59 8.71 8.70 8.76 8.00
unchanged repo rate throughout our forecast period (until Q2 2024,
NOK/SEK 1.00 1.00 1.01 0.99 0.99 1.01 according to the July report), but there are signs that the bank is
GBP/SEK 11.92 11.96 12.02 12.05 12.22 12.54 slowly moving towards a slight tightening policy. Rising resource
JPY/SEK 7.88 7.77 7.84 7.76 7.75 8.89 utilisation and inflation expectations lead us to believe that within
*Based on the SEB LTFV model six months the Riksbank could signal rate hikes at the end of its
forecast horizon. Support for the exchange rate from monetary
policy is still remote as the zero-interest-rate policy is firmly
anchored in combination with the Riksbank following in lockstep
with the ECB. Once/when/if the Riksbank deviates more clearly from
ECB policy then a larger move in the exchange rate is likely to occur.
The Riksbank is also pursuing the policy of creating a self-financed
FX reserve, buying/selling approx. SEK 5bn/month and buying FX
(primarily EUR and USD). This will continue to be a drag on the SEK
until dec-2023 when these FX purchases are expected to be done.
18 — Currency Strategy September 2021EUR/SEK
National savings are leaving the country?
In the upcoming SEK Views report due to be released on 20th
October, we will dig even deeper into this theme which we label as a
structural outflow from Sweden. Last spring, the Riksbank wrote a
paper on the balance of payments and the exchange rate saying
that the relationship between the two had broken down as Sweden
has generated large surpluses in the Current account, but the SEK
has been in a REER downtrend for the past 27 years. The
downtrend could be explained by increased saving during 1995-
2008 when Swedish interest rates were pushed down and capital
sought better return abroad. During 2009-2018, however, the
national savings surplus fell and despite this the SEK continued to
weaken. The Riksbank highlights a few factors which could be
responsible for the weakening correlation between the CA and the
exchange rate: 1) the scale-back of foreign ownership of Swedish
government bonds; 2) the SEK developing into a carry currency;
3) pricing in dominant export currencies, primarily the USD;
4) global value chains; and 5) re-exports. The latter three help
explain why the current account is not that important anymore for
exchange rates, and this in turn makes financial flows even more
significant today. Swedish companies seem to prefer to invest
abroad as the Net FDI in the International investment position keeps
growing. We are also seeing a clear preference by households and
institutions to accumulate foreign equities as the net buying of
foreign equities since the Covid-19 crisis started amounts to close to
SEK 500nn. Foreign investors are far from making such large
purchases of Swedish equities.
Awaiting the review of AP7 investment mandate
AP7, “Sjunde AP-fonden” (Seventh AP Fund), is the state
alternative to the private investment funds offered within the
Swedish premium pension system (PPM). There is currently a
Government Committee of Inquiry on including AP7 into the same
investment guidelines as the other buffer funds AP1, AP2, AP3, and
AP4 which could mean that the fund will have to start FX-hedging
its foreign assets. If this is decided, it would likely take years to
implement but would have a significant flow effect on the SEK, most
likely offsetting the current Riksbank selling of SEK 5bn/month
(done by the Riksbank in order to build its FX Reserves). The AP1-4
funds are allowed to have FX exposure of up to 40%. It is
reasonable that AP7 would be allowed a higher exposure, but even
having 60% FX exposure means it would have to hedge (i.e, sell FX
and buy SEK) close to SEK 300bn. The government proposal may be
tabled in Parliament in mid-September, which is clearly a flow
factor to keep in mind and is potentially substantially SEK positive.
Valuation is only a small positive
Long-term fair value has shifted higher for EUR/SEK over the past
10 years. In the latest update which includes Q2 2021 data, our
model puts LTFV in the EUR/SEK and USD/SEK at 9.64 and 8.00,
respectively. When looking at underlying developments in the
relative unit labour cost (graph below) a similar story can be seen
with the EUR/SEK now only a few percent overvalued according to
these different methodologies. Hence, although we think the SEK is
undervalued, this is not as convincing an argument to buy the SEK as
was the case when it was trading closer to 11.
Currency Strategy September 2021 — 19EUR/NOK
EUR/NOK
Limit market reactions to rate hike but some NOK support
After having been one of the best performing G10 currencies this
spring, the NOK clearly underperformed during the summer.
Generally weaker risk sentiment, which tends to be bad for the NOK
Norges Bank with mild was exaggerated by low summer liquidity and positioning.
However, while our short-term fair value models indicate that the
NOK support rate spread have had relatively weak impact on the NOK this year,
this pattern seems to have shifted in recent weeks. After having
lowered its key rate to zero in May last year, Norges Bank is now
one of the first central banks that will leave its crisis rate behind.
The bank is widely expected to hike the policy rate to 0.25% when
it presents a new MPR on September 23. Latest economic data also
indicate a strong economic rebound and the combination of stronger
growth, lower unemployment and a weaker NOK indicate quite
NOK is one of the best performing G10 currencies large upward revision to Norges Bank’s already hawkish rate path.
this year. EUR/NOK has fallen by around 3.3% year- While uncertainty related to the pandemic will probably continue to
to-date but is at 10.14 some 2% higher vs. its yearly make the bank slightly more cautious in its judgement, we expect
low late April. The main reason for the NOK strength the path to once again be revised slightly higher in 2022. We
this year is expectations on rate hikes from Norges forecast policy rate at 0.50% by end-2021, 1.25% end-2022 and
1.50% end-2023.
Bank already in H2. We believe in a hike next week
and upward revised rate path but much of that is The pricing on Norges Bank has increased since August and the
probably already priced in. The NOK has a tendency market is already speculating if Norges Bank could hike the rate
more than two times this autumn. We doubt it and expect our
to weaken whenever attention deviates from its hawkish view to have limited impact on rates given the already
central bank why we have a rather muted 10.00 hawkish pricing. Hence, while an actual rate hike and a slightly
forecast for end of 2021. upward revision to the June path should be positive for the NOK,
the recent NOK strengthening also speaks for limited market
reactions. However, developments in EUR/NOK around the last first
rate hike (September 2018) show that EUR/NOK could potentially
continue to decline following the decision even if the rate spread
does not support such a development. In 2018, the rate spread and
EUR/NOK started to head lower about two weeks before the rate
hike and while the rate spread traded mostly sideways the
following two weeks, EUR/NOK continued lower. However, after
recent strengthening, we see limited further support for EUR/NOK
and we target a move towards 10.05 in coming months and
EUR/NOK bottoming at 10.00 by early 2022.
Oil could become a NOK headwind
If our forecast for Brent crude to average USD 65/bl in Q4 2021 will
turn out correct the oil price will become a NOK headwind
approaching year end. However, there is currently a clear upside
risk for the oil forecast as that was based on US oil production being
expected to rise gradually through the autumn. But hurricane Ida
has thrown that around as US crude production last week was still
down 1.4 m bl/d versus before hurricane Ida. Right after the
hurricane struck the first assessments were that there were few
damages to US Gulf production, but that assessment was obviously
premature and now there is fear of another hurricane with
16 Jun 1M Q3 21 Q4 21 Q4 22 LTFV* possibilities to further hamper US production. On the other hand, the
EUR/NOK 10.09 10.00 9.80 9.75 9.85 9.76 demand outlook is equally uncertain due to Covid-19 and its
USD/NOK 8.32 8.13 7.90 8.26 8.72 7.98 development during the autumn. Thus, the oil price could become a
NOK/SEK 1.00 1.00 1.02 1.01 0.98 0.99
NOK headwind in Q4, but it is far from certain given the extra
GBP/NOK 11.72 11.76 11.67 11.47 11.32 12.52
uncertain oil outlook.
*Based on the SEB LTFV model
20 — Currency Strategy September 2021EUR/NOK
NOK valuation supports stronger NOK
Making a long-term valuation of the NOK is a bit trickier than in
other currencies due to Norway’s large energy sector and its unique
set-up with substantial transfers to the Government Pension Fund
Global. The latter partly neutralises export-related capital inflows
and is also a reason for why changes in Terms of Trade are not
necessarily generating currency flows. Our long-term fair value
estimate in EUR/NOK is 9.56, down from the 11.12 spike seen in Q3
2020. Hence, also valuation supports a move lower in EUR/NOK.
Source:
Currency Strategy September 2021 — 21USD/CNY
USD/CNY
Offsetting factors have kept the yuan in a range in the last three
months
Since mid-June, USD/CNY has traded within 6.40-6.50, largely
shrugging off the rise in the broad dollar index. Even so, the
Support for yuan to be currency is holding on to year-to-date gains of 1.0% and 1.3% for
the offshore and onshore yuan, respectively, making the yuan the
capped by Fed second best performing currency in the EM Asian currency suite
after the Taiwan dollar. Although we still expect a relatively
resilient yuan, the likely beginning of tapering by the Federal
Reserve by December will limit the appreciation of the yuan to 6.40
by end-2021.
Chinese assets are struggling amidst tightening regulations
Since the beginning of the year, regulators have been introducing a
Offsetting factors have kept the yuan in a range in series of regulatory changes targeting fast-growing companies like
internet giants and private education. The government’s focus on
the last few months. Appreciation pressures eased fostering “common prosperity” has led to regulations that are
as expectations of Fed tapering gathered pace. The designed to align corporate behaviour with social equity goals. As a
easing bias of the PBoC also took away some of the result, foreign investment sentiment languished. Although the latest
support for the currency. We expect USD/CNY to Northbound Stock Connect data show that foreign buying has
approach 6.40 by end-2021 on the back of foreign somewhat returned, it is still some way from the strong inflows
reported earlier in the year. The near-term outlook on equity flows
inflows due to the beginning of the bond index will likely be volatile considering high policy uncertainty.
inclusion process in October.
The beginning of Fed policy normalisation will provide support
for the USD
Although shifting market expectations on the timing of tapering
have led to choppy moves in the USD, communications from Fed
officials continue to point to a tapering before end-2021. We expect
the Fed’s asset purchases to decline by USD 15bn per policy
meeting, suggesting that substantial liquidity provision will come to
an end by Q3 2022. Subsequently, we expect the first rate hike by
Q1 2023.
Domestically, the turn towards supportive monetary policy has
moderated the appreciation pressures for the yuan
Following the announcement of the broad-based 50 bps cut in the
reserve requirement ratio (RRR) in early July, the yield on 10-year
government bonds has declined to 2.88% from 3.00%. Yet, with
the pull back in US 10-year yields, the rate differential has remained
broadly steady in the last quarter. We expect the People’s Bank of
China (PBoC) to make targeted reductions in the RRR of 50bps in
both Q4 2021 and Q1 2022. Policymakers have also reiterated
their intention to boost credit access for small and medium
enterprises (SMEs). To this end, the State Council instructed the
central bank in September to add CNY 300bn to re-lending quotas
for SMEs and self-employed individuals.
We expect fiscal support to ramp up in the near term
An increase in government bond issuance could ease financial
conditions further, even without a cut in policy interest rates.
Growth in aggregate financing has been on a downtrend, primarily
16 sep 1M Q4 21 Q1 22 Q4 22 due to the slowdown in government bond issuance this year. The
USD/CNY 6.45 6.43 6.40 6.38 6.30 issuance run rate is coming in well below the annual quota set in
EUR/CNY 7.59 7.52 7.42 7.33 7.12 early 2021, providing room for policymakers to raise funding. Even
CNY/SEK 1.34 1.34 1.36 1.36 1.39 with the anticipated cuts in RRR in Q4 and Q1 2022, we expect the
CNY/NOK 1.33 1.34 1.35 1.38 1.41 incoming rise in bond issuance to limit the decline in China’s 10-year
GBP/CNY 8.91 8.95 8.84 8.83 8.79 yields to a range of 2.60-2.80%.
*Based on the SEB LTFV model
Despite the easing of appreciation pressures against the USD,
the yuan continues to be resilient on a relative basis
The trade-weighted RMB Index remains elevated hovering around
99 as of mid-September, a high last seen in March 2016. Looking at
the daily CNY adjustments, the central bank seems to be
comfortable with the current level of USD/CNY and is not actively
capping the strength of the RMB Index.
22 — Currency Strategy September 2021You can also read
