FX Forecast Update: The GBP Sell-Off Has Just Started

EUR/GBP. We are adjusting our EUR/GBP forecasts in line with what we communicated before and immediately after Brexit. We now forecast EUR/GBP at 0.86 in 1M, 0.88 in 3M, 0.90 in 6M and 0.88 in 12M. Near-term, we expect prolonged political uncertainty will weigh on the UK economy and interest rate policy. The UK runs a current account (CA) deficit around 5% of GDP. Given uncertainty about near-term FDI and portfolio flows into the UK, the CA will have to adjust, which should imply a sharp fall in domestic demand and a weaker GBP to support exports. Longer-term, we expect the GBP will stabilise to some extent given attractive valuations

EUR/USD. We are adjusting our EUR/USD forecasts in line with what we communicated before and immediately after Brexit. We now forecast EUR/USD at 1.09 in 1M (1.11 previously), 1.07 (1.10) in 3M, 1.10 (1.14) in 6M and 1.14 (1.18) in 12M. Short-term, we expect increased political uncertainty in the eurozone and the prospects of further monetary easing to weigh on EUR/USD. However, medium-term we continue to expect that the undervaluation of the EUR and the large eurozone-US current account differential will support the EUR.

EUR/NOK. While we got the EUR/NOK direction on a ‘leave’ vote right (despite coinciding EUR weakness), we overestimated the short-term downside potential in oil prices. Having said this, ‘Brexit’ still significantly increases the uncertainty related to the economic outlook of Norway’s closest trading partners. This, in turn, increases the need for maintaining a weak currency in the current transition phase with low and only a gradually improving growth outlook. We expect Norges Bank to cut rates by 25bp in September and likely again in December to 0% (c. 35bp priced on a 12M horizon). We forecast EUR/NOK at 9.50 in 1M (from 9.40), 9.40 in 3M (9.30), 9.20 in 6M (9.10) and 9.00 in 12M (8.90).

EUR/SEK. The knee-jerk reaction in EUR/SEK has been more or less as expected given the unexpected outcome in the referendum. Hence, the krona is currently the Riksbank’s best friend with KIX trading close to 3% higher than its Q3 forecast. Our base case is, and has been, that the krona will be weaker with Brexit due to risk aversion and general uncertainty as well as due to repricing of the Riksbank and the ramifications on growth. On the back of extended/prolonged QE by ECB the likelihood of a prolongation by RB after end 2016 has increased. This is, however, not likely to be announced until October, while we expect the Riksbank to lower its repo rate path at the July meeting, pushing the first rate hike into 2018. Under these circumstances, risk-sensitive and procyclical currencies like the krona tend to underperform. Therefore, we see EUR/SEK trading in the 9.30-9.50 range for the next few months amid continued political uncertainty. That said, the relative economic outlook suggests that the krona will rebound over time vs the dollar and the euro while fundamental models indicate the krona is substantially undervalued. In all, we raise our forecast profile for EUR/SEK to 9.40 (9.30) in 1M, 9.30 (9.20) in 3M, 9.20 (9.10) in 6M and 9.10 (9.00) in 12M.

EUR/DKK. We forecast EUR/DKK to trade at 7.4375 on 1-12M (1M revised up from 7.4355) as uncertainty about the future of the EU and potentially the EUR should keep demand for DKK and DKK assets high. We still look for Danmarks Nationalbank (DN) to cap EUR/DKK downside around 7.4350 by selling DKK in FX intervention.

USD/JPY. We are lowering our USD/JPY forecasts to 105 in 1M (108 previously), 107 in 3M (112), 108 in 6M (112) and 108 in 12M (112). Brexit and our call that the Fed will now be on hold for the rest of 2016 imply that there is less room for USD/JPY to move higher. We continue to expect that BoJ will ease aggressively in July by cutting interest rates by 20bp and to announce additional quantitative easing. In addition, the risks of FX intervention are increasing. Hence, we expect USD/JPY to edge higher on 0-3M and stabilise medium-term.

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