#Articles — 15.02.2021

Forex Focus

Guy Ertz, Chief Investment Advisor

Norwegian Krone: upside potential I BNP Paribas Wealth Management


  1. Stabilizing infections rates, stricter lockdown measures and volatile market sentiment marked January. The vaccination campaigns are picking up steam and potential new vaccines support positive expectations. Possible strong economic recovery from the second quarter on.
  2. Renewed uncertainty led to high volatility: The USD rebounded, but the gains should be short-lived. We forecasted a consolidation of the EURUSD around 1.20 short-term. Our 12-month target remains at 1.25
  3. The UK, Brazilian and South African variants are a source of downside risk short-term: The ability of vaccine providers to adapt will be key. Safe haven currencies like the CHF and JPY were broadly unaffected.
  4. Scandinavian currencies should evolve in opposite directions: The SEK should depreciate moderately before stabilizing while the NOK has more upside. We revised our 12-month EURSEK and EURNOK targets to 10.2 and 9.9, respectively.

Chinese economic indicators suggest a global economic recovery: Commodity currencies have been volatile during the month but still have some room for appreciation this year. We adjust our 12-month targets for the USDCNY, USDCAD, AUDUSD and NZDUSD to 6.4, 1.25, 0.8 and 0.75, respectively.


Economic recovery not in favor of the franc

The CHF didn’t depreciate substantially in spite of the positive market sentiment following vaccine rollouts and the Democratic senate win in Georgia. Additionally, indicators suggest that investors are overweight the CHF. We expect the positive sentiment towards the currency to fade over the coming months. Our 3-month target remains at 1.08 (value of one euro).

The swiss central bank’s stance supports our bearish CHF view. The monetary authority still considers the currency as highly valued. We expect any significant declines in EURCHF to be short lived as long as the SNB’s reaction function remains unchanged in 2021. Given Switzerland’s expansionist monetary policy, we think that the franc will weaken over the coming year. Low yields, low inflation expectations, reduced risk premia, the desire of the SNB to cap the appreciation of the CHF together with the expected improvement in the global economic outlook support our view.

We expect the EURCHF (value of one euro) to rise to 1.11 over the coming year.


A slow recovery ahead

In spite of less stringent health measures than elsewhere, the fall in Japanese GDP in 2020 will be historic. The expected rebound could be limited. Indeed, consumer confidence and business activity indicators are stagnating, sending mixed signals about domestic demand. Its economy should, however, benefit from the rebound in global growth and trade expected in 2021. We expect a 5.3% contraction  in 2020 followed by a limited rebound of 1.1% in 2021 and a strong rebound in 2022 with 3%. Deflation remains a key concern for the country’s future. We expect 0%, -0.4% and -0.3% in 2020, 2021 and 2022, respectively.

On the monetary side, policies should remain expansionary, in a context of low inflation. The Bank of Japan kept its monetary easing policy unchanged. The policy rate remains at -0.1% and the 10-year government bond yield target at 0%. In December, it extended its emergency lending program by six months until September 2021, as Japan faced a record spike in new Covid-19 cases. We expect the BoJ to be cautious to avoid unwelcome appreciation pressure on the yen around year-end.

We expect the USDJPY to hover around 104 (value of one dollar) over the next 3 months and 102 over the next 12. This suggets marginal appreciation for the yen.


Moderate depreciation short-term

The SEK appreciated by 4.6% against the euro in 2020 but it has started to decline in 2021. Economic forecasts predict a 3.1% GDP contraction in Q1 2021, followed by a 6.7% increase (yoy) in Q2. The unemployment rate could jump as high as 9% in Q1 and progressively decrease starting from Q2. 

Furthermore, inflation expectations are close to 6-year lows, which could prompt the Riksbank to turn more dovish. The risk seems skewed to the downside as markets are not yet pricing a rate cut in Sweden, which would mean stepping into negative territory as the policy rate currently stands at 0%. At its last meeting (10th Feb.), the Riksbank kept monetary policy unchanged and pledged its support to the economy in this difficult period. It emphasized that reduced confidence in the inflation outlook could prompt a repo rate cut.

Over the coming 12 months, the expected global recovery should help the economy, which relies on global trade. Therefore, we revise our EURSEK target to 1O.2 over the next 3 and 12 months (from 10.5 previously). This suggests some downside for the SEK.


Bullish outlook for the NOK over the year

The NOK is one of the currencies that suffered the most from the covid-19 crisis. It has been recovering well since December and we believe it will keep doing so in 2021, appreciating back to pre-pandemic levels. The economy held up well to new sanitary measures and business confidence has been stable thanks to the vaccines rollouts. A potentially strong upward move in value stocks could provide further tailwinds to the krone.

On the monetary side,  the Norges bank kept its  policy rate at zero at its last meeting (20th Jan.) but is expected to increase it in early 2022, maybe even sooner as house prices rise and credit growth recovers. Core inflation stands at 3%.

We revised the EURNOK to 10.20 over the next 3 months (from 10.70 previously) and to 9.9 over the next 12 months. This suggests strong upside for the NOK.


Trade tensions with China could hurt the AUD

The AUD had a great performance against the dollar in 2020. Domestic data is supportive and China’s recovery further boosted commodity prices. Iron ore exports are however at risk given the recent tensions with China. Moreover, China is likely to increase its domestic production of iron ore as well as its use of alternative sources, such as scrap steel.  This should reduce imports and  could hurt both iron ore price and the AUD. Nevertheless, the AUD is a cyclical currency that will take advantage of the global economic recovery later this year and the interest rate differential with the US.

On the monetary side, the Central Bank (RBA) could be sensitive to currency strength in the coming months. The RBA still has scope to ease policy further, via QE expansion or negative interest rates. At its last meeting (2nd Feb.), it extended its bond buying program by $100 billion (doubling the initial amount). We expect the RBA to leave interest rate just above zero through at least 2022 as wage growth should be flat and inflation in general should remain low for a long time.

We update our AUDUSD 3-month target to 0.76 (from 0.73). Our 12-month target is now 0.8 (from 0.73). This implies further appreciation potential.


New Zealand keeps  solid fundamentals

The NZD was also a strong performer against the USD in 2020. Similar to Australia, data in New Zealand has improved considerably in recent months and the currency benefitted from rising commodity prices. It should also take advantage of the global economic recovery later this year and the interest rate differential with the US. The recent free trade deal between New-Zealand and China should further support the country.

On the monetary side, the central bank (RBNZ) pushed back against currency strength in 2020 and could do so again this year. Nevertheless, markets are not expecting a rate cut this year. While the RBNZ has the policy tools necessary to respond to a stronger currency, the solid domestic economic backdrop means that the NZD has room for appreciation before policy actions are required. Moreover, low rates as well as fiscal and monetary stimulus have propelled house prices to historical highs, which makes a rate cut unlikely. The policy rate is expected to stay at 0.25% in New-Zealand until at least 2022.

We update our NZDUSD 3-month and 12-month targets to 0.72 and 0.75 (from 0.69 and 0.71), respectively. This implies further appreciation potential as well.


Global recovery supports the CAD

The CAD has benefitted from rising oil prices and recent comments from the central Bank of Canada (BOC). We expect closer trade relations with the USA but President Biden’s policies could hurt Canada’s ability to move oil to market. The main drivers of the CAD appreciation remain the low interest rate differential with the US, the global recovery and the risk-on sentiment of investors.

On the monetary side, the market expects the BOC to tighten before the Fed, despite the authorities reiterating at its last meeting that no interest rate hike is expected before 2023. The policy interest rate stayed at 0.25%. Moreover, given the importance of the trade links with the US, a strong currency could lead to a more accommodative policy stance or to delay the exit. This is likely going to reduce investors’ perception of risk-reward for remaining long CAD. Nevertheless,  we do not expect the CAD to appreciate enough for the BOC to take actions.

Therefore, we review our 3-month target for the USDCAD from 1.31 to 1.27 (value of one dollar) and our 12-month target from 1.29 to 1.25. This suggests more upside.


Limited appreciation for the CNY in 2021.

The CNY carried its strong performance of 2020 into January. The 6.5% GDP growth in Q4 2020 was a positive surprise. In December, industrial production also beat expectations, at 7.3% (yoy), the best performance since May 2019. The large government expenditure programs worldwide and supportive monetary policies support a favorable outlook for 2021. The downside risk is linked to covid-19: schools closed in Bejing and the province of Hebei moved into lockdown. We could see a limited appreciation of the currency in Q1, followed by a pullback in Q2 mainly because of the dividend payouts season, which prompts capital outflows.

Meanwhile, monetary authorities should limit further CNY appreciation. While credit normalisation has begun, we don’t expect imminent interest rate hikes. Moreover, with the resumption of production in overseas countries, China’s export growth should decline whereas import growth should rise. The resulting narrower trade surplus is likely to diminish the appreciation pressure on the CNY.

Therefore, we see USDCNY fluctuating around current levels (6.5) in the short-term and to 6.4 over the next 12-months (6.5 previously). This suggests marginal upside.