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In this publication: We stick to our long US dollar calls but we see now less upside for the US dollar. We are positive on the Norwegian krone and add long NOK versus euro to our conviction calls. This reflects monetary policy divergence, an expected moderate oil price recovery and attractive valuation
160219-FX-Conviction-update.pdf (280 KB)
Implications of our view changes on our high conviction calls
Earlier this week we have adjusted our growth, central bank and currency forecasts. The changes to our Fed forecasts mean we are likely to see less dollar strength this year. But we also expect more monetary stimulus by the ECB and the BoJ. This will likely result in pressure on the euro and the yen. We stick to our long US dollar calls. The improvement in investor sentiment and more monetary easing elsewhere should support the US dollar versus the euro, the yen, the Australian dollar, the New Zealand dollar and sterling. We see EUR/USD at 1.05 (preciously: 1.00) and USD/JPY at 120 (previously: 130) at year end. The uncertainty surrounding the Brexit referendum, weaker UK growth and a delay of BoE rate hikes should also weigh on sterling, pushing GBP/USD towards 1.35.
We add long NOK versus euro to our conviction calls
In addition, we would like to add one new high conviction call: long Norwegian krone versus the euro (short EUR/NOK). For a start, our energy analyst expects a recovery in oil prices during the course of this year. This will give a boost to the sentiment for currencies of oil exporting countries such as the Russian ruble, Mexican peso and the Norwegian krone. Norway has relatively strong fundamentals compared to other oil exporting countries such as fiscal surplus and current account surplus. In addition, although we expect the Norges bank to cut policy rates by 25bp in March, most of this is already reflected in the price. It is likely the last cut in the cycle and this would be an insurance rate cut. When oil prices recover as we expect also the Norges bank will likely become less dovish as inflation is close to target. The Norwegian economy is more geared towards the eurozone than the US. We have already in place positions with exposure to the US economy and to the US dollar. A new position in EUR/NOK will therefore diversify our calls next to being it an indirect oil price recovery story. Last but not least, the Norwegian krone is cheap terms of valuation. The Purchasing Power Parity is around 8.15 in EUR/NOK. In short, we expect the ECB to be more dovish than the Norges bank this year and oil prices to recover. In addition, the Norwegian krone is relatively cheap. Therefore, we enter long Norwegian krone versus euro as high conviction view. We place our stop loss at 10
Introducing stop losses/profit protection
We introduce stop losses on all our high conviction calls. This is to protect profit or to avoid substantial downside on our calls. In general these are profit protection because most of our calls are already in place for some time and these positions are in profit. There is one exception, our short euro long US dollar position. This is the only position that is in the red. So far this year, we have given back some of the gains made last year.