SEB wins anticipating weak USD gains

BoJ could be forced into further QE before 2015



SEB topped last week's 12-month currency forecast rankings, having anticipated that even if the US Federal Reserve announced it would start reducing its monetary stimulus, the scope of dollar gains against the yen and the euro would be smaller than predicted.

On August 30, 2013, the bank forecast USD/JPY, then trading at 98.20, to rise to 104. Carl Hammer, chief currency strategist at the Swedish bank, says they had a fairly bearish view that the yen would continue to weaken due to Japan's own structural economic problems.

The bank predicts the yen to weaken further against the dollar, reaching 112 in the long term, but in one month it should appreciate to 101 as inflation is stalling and Japan continues to reduce its energy dependence. This could force the Bank of Japan (BoJ) to undertake a fresh round of quantitative easing (QE).

"We expect inflation to fall back towards 1.5% in October, but the BoJ expects inflation to then start rising again. Furthermore, the current account deficit will narrow, Japan will also restart a couple of nuclear power plants and hence flows will be less yen-negative. Should inflation and also USD/JPY fall back in line with our forecast, we expect a new round of aggressive BoJ easing in the fourth quarter," Hammer says.

The bank had forecast EUR/USD to fall to 1.28 from the 1.32 it was trading at in late August last year. The overall consensus was one of euro weakness, but many saw the pair dropping further to 1.24.

"We pointed to a cautiously lower EUR/USD given the improvement in the inflows outlook for the euro," says Hammer.

The pair had surged above 1.38 by the end of October, and Hammer attributes that rise to global asset managers taking advantage of European assets trading at a discount.

"European assets came with a 'valuation discount', before the introduction of the European Central Bank (ECB) policies laid out in August 2012. You had attractive levels to buy sovereign bonds and also equities. But now these assets are much less attractively priced, as weaker financial inflows over the past two months show," he says.

The bank forecast the euro to weaken gradually against the dollar, staying at 1.30 in its one-month forecast, and sliding to 1.29 in three months. With inflation sinking further in August to 0.3%, the ECB may be forced to adopt QE next year.

"The eurozone on the verge of entering deflation clearly speaks for more policy action, and the ECB will be forced into QE. Purchases of government bonds or other assets will likely happen in early 2015," Hammer says.

SEB has topped last week's 12-month currency forecast rankings. On August 30, 2013, the firm's forecast was:

12-month forecast September 1
EUR/USD 1.28 1.31
USD/JPY 104 104.13
EUR/JPY 133 137.58
GBP/USD 1.55 1.66
USD/CHF 0.96 0.91

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