Pick-up in volatility takes SEB to top

The Swedish bank sees EUR/USD trading at 1.08 by June



SEB topped last week's 12-month forecasts by taking the view that currency movements would widen as a consequence of the major central banks' diverging policies.

Interest rates close to zero in developed economies led to a low volatility environment for most of 2014, but with the US Federal Reserve tapering its stimulus programme, – a process it finished in October – volatility began to pick up, says Carl Hammer, chief currency strategist at SEB.

"Volatility has been picking up because of the Fed's policy diverging from the rest of the developed economies, and also the fact that exchange rates and their levels are even more important for central bank policy now in the context of policy rates," he says.

There was also the added element of there being a decreased appetite for risk because of lower liquidity, says Hammer. "Liquidity was also poorer due to regulations and electronic trading, which sometimes makes for erratic FX moves, making risk appetite poorer as a result of the worsened liquidity," he says.

On January 24, 2014, SEB forecast EUR/USD, then trading at 1.37, would fall to 1.28 in about a year's time on the prospect of the European Central Bank (ECB) increasing its easing stance.

In early 2014, the ECB's main interest rate stood at 0.25%. Over the following months, EUR/USD stayed above 1.35, generally range-bounding between 1.36 and 1.38. But, when the ECB cut rates to 0.15% and imposed a -0.10% rate on bank deposits in June, the pair started a gradual descent. The fall gathered pace after the bank cut rates again to 0.05% and reduced the rate on bank deposits to -0.20% in September.

"We forecast EUR/USD would cease rising and the pair would depreciate as the ECB moved towards more easing while the US economy would continue to grow," says Hammer.

The bank expects these forces to keep pushing the pair down to well below the 1.10 level, and towards 1.08 by June and 1.05 by December this year.

With GBP/USD trading at 1.66 about a year ago, the bank's forecast of 1.52 was nearly spot-on as cable was at a low of 1.51 on January 19. SEB sees the pair trading only marginally lower, pulled by the EUR/GBP cross, which in turn will follow EUR/USD lower.


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