Loonie strength to extend into 2H22
Current spot: 1.2840
- The loonie has been the best performing G10 currency in the past month (+3% vs USD), benefiting from a desirable combination of rising oil prices, limited exposure to main sources of global risks (Russia/Ukraine and China) and a hawkish domestic central bank.
- In our view, the USD/CAD downtrend has further to go, as the factors that have helped CAD strengthen of late should last into year-end. We target 1.22 in 4Q, with risks skewed to 1.20. However, in the shorter term, some temporary spikes back to 1.29-1.30 can’t be excluded given the unstable risk environment.
- Given Canada’s strong domestic economic performance and high inflation, we expect 50bp hikes by the BoC in July and September. We estimate the BoC’s terminal rate 50bp above the Fed’s.
Still looking unattractive
Current spot: 0.6994
- We remain of the view that the Australian dollar is the commodity currency with the least attractive outlook for the remainder of the year.
- The RBA has surprised with a 50bp rate hike in June, but a) AUD has been quite detached from domestic monetary policy developments and b) markets are pricing in too much tightening (285bp in the next 12 months) considering the inflation picture in Australia is less worrying than in the US or the eurozone.
- External risks remain significant, especially from China’s economic slowdown and potential spill-over into the iron ore market. We see a drop below 0.70 in the near-term, and a return to 0.72 only in 4Q22.
A safer option than AUD?
Current spot: 0.6313
- The Kiwi dollar is also set to be negatively impacted by the clouded outlook for the Chinese economy. However, New Zealand’s exports are not as reliant on China as Australia’s.
- Incidentally, inflation is higher and appears more entrenched into the NZ economy than in Australia, which suggests the RBNZ will remain more hawkish for longer.
- We expect the RBNZ to bring rates to 3.5% at the start of 2023, potentially earlier should housing inflation prove sticky. In our view, all this should lead AUD/NZD to slip back to 1.07-1.09 in 2H22, and NZD/USD to climb to the 0.69 mark towards the end of the year, benefiting from some potential USD weakness.
NBP hikes call for further PLN gains
Current spot: 4.6252
- The National Bank of Poland's policy tightening will be much stronger than either the Fed’s or the ECB’s. This justifies further appreciation of the zloty, especially as market tensions related to the war are clearly easing. Moreover, comments from the EC point to the imminent launch of the Recovery Fund (actual flows may start as soon as in September but will not be large). This will provide some support for the zloty, as EU funds will be exchanged on the open FX market, not off-market via the NBP.
- We expect €/PLN to reach 4.50 or slightly below by the end of the year. In 2023, the appreciation of the zloty should continue, driven by high NBP rates and inflow of EU money, even below 4.40 in 4Q23. We see the policy rate heading to 8.5% into 2023.
Too many burdens for the forint to shine
Current spot: 397.44
- The forint took a major blow after the government announced new fiscal measures and the situation was not helped by the NBH raising rates by "only" 75bp.
- HUF is still our least preferred currency in the CEE region, but on the other hand it still has the greatest potential for appreciation.
- In the short term, we see EUR/HUF around 395 with a possible quick move to 385 if any of the external factors (war, rule of law debate, etc) show early signs of improvement, which would reduce the risk premium.
FX intervention as new standard
Current spot: 24.71
- The appointment of new Czech National Bank board members has made the situation a little clearer. However, regardless of the board's view, we think that more CNB activity in the FX market is inevitable in 2H22.
- The CNB does not comment on FX interventions, but our estimates are that it has been more and more active recently and we continue to believe that the EUR/CZK 25 level is a key pain threshold.
- With inflation rising, we believe they will gradually move down to 24.70-24.90 levels. However, we do not see much reason for CZK to appreciate without CNB intervention. Therefore, we expect it to remain relatively stable.
Business as usual still
Current spot: 4.9463
- The 4.95 level remains untouchable for the moment, with strong offers in the 4.9480-4.9500 range taming any upward pressure.
- We expect another 75bp hike from NBR in July to bring the key rate at 4.50%. Inflation continued to surprise to the upside and will most likely exceed 15.0% in June. This should be the peak but the road to lower levels will be very gradual.
- The liquidity shortage remained ample in May, at over RON12bn. This continues to keep market rates very much decoupled from the NBR’s key rate and even from the credit facility. We maintain our 5.50% estimate for the terminal key rate, but upside risks are building again.
On autopilot until 1 January 2023
Current spot: 7.5225
- In the 2022 Convergence Report issued on 1 June, the European Commission and the ECB have concluded that Croatia is ready to adopt the euro on 1 January 2023. The decision was largely expected.
- The Convergence report shows that Croatia meets the nominal convergence criteria. The final decision on euro adoption -which at this point seems only a formal one – will be taken by the EU Council in the first half of July.
- The FX rate at which the euro adoption will take place will likely be very close to the 7.5345 central parity rate at which Croatia was included in the ERM-II.
Increased – but still limited – flexibility
Current spot: 117.42
- After selling EUR1.17bn in March – an historically high amount, the NBS reduced its selling to only EUR155m in April. The trend has reversed in May when the NBS intervened by buying euros.
- Somewhat surprisingly but fully explainable by the inflation dynamics, the NBS has allowed the dinar to appreciate mildly in May towards 117.4 area. This might signal that the FX rate could be used in-sync with the interest rates to tame inflationary pressures.
- The 50bp rate hike pace continued in June, bringing the key rate to 2.50%. We maintain our estimate for the key rate to reach 3.50% by the end of 2022.
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