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After a volatile third quarter, uncertainty ahead Back  
Finance invited bond and currency market experts to give their outlook for the coming quarter and predict the level of key indicators at quarter end. The following are the assessments for the current quarter and look back at how Q3 predictions compared with the outcome.
Currency calls were over optimisitc for Q3

Phelim Keogan, Chief Dealer, National Irish Bank Treasury

EUR/USD 0.87
EUR/GBP 0.57

Looking back: Putting it mildly, my assertion that ‘the euro is finally over the worst’ proved to be my undoing! The euro spent the initial weeks of the quarter within predicted ranges, but unexpectedly broke to the downside as misguided market optimism gave way to the ECB policy of ‘benign neglect’. The situation got somewhat out of control over the summer as the EUR/USD gave up fully 10%, until G7 intervention.

Looking forward: The US is experiencing a ‘soft-landing’ while the UK and Europe are also seeing less-robust growth rates, probably as a consequence of higher oil-prices becoming entrenched. Japan still has a long way to go and would prefer a weaker Yen to assist in its recovery; we should see USD/JPY finally breach the 110 area fairly soon. Though the concerted intervention was enough (for now) in bringing order to the currency market, it does not appear designed to actually drive the Dollar lower - the market may test the central banks’ resolve over coming months. I expect erratic conditions through to year-end.

Derek Keogh, manager of Corporate FX Desk, Anglo Irish Bank

EUR/USD: 0.92
EUR/GBP: 0.61
EUR/YEN: 100
USD/YEN: 109

Comments: I am surprised by the amount of volatility in the last quarter. The recent intervention by the ECB, while inevitable, took the market by surprise. The impact of the Danish referendum result is likely to be seen over the medium to long term, especially if the euro fails to gain support from the recent intervention.

Looking forward: My end of year predications are based on a 50 bps rise in euro interest rates, and UK and US interest rates remaining unchanged. At the time of writing, the futures market is only pricing in 25 bps rise from the ECB, but I feel another rise will be seen by year end. I expect the euro to lose further ground over the coming two months if the ECB fails to deliver interest rate rises in line with market expectations. The US elections are unlikely to cause any major weakness in the US, given that the currency strength has been accredited to a strong economic background. Elsewhere, the Yen looks steady at current levels of 108 against the US unit. Overall, I expect the volatility of the markets to remain at current levels, which will lead to new lows being tested for the euro over the last quarter of this year.

James Jordan, Bank of America, Foreign Echange Sales and Trading

EUR/USD: 0.87
EUR/GBP: 0.60
USD/JPY: 109

Comments: The break of the important 0.92 support in the EUR/USD negated the bullish outlook and put this pair under pressure again. The level proved to be a good bear trigger in hindsight, with the downtrend resuming from there in earnest. 0.92 will be bull trigger now with a break above it needed to negate the downside potential over the next few months. Until then further downside is likely towards targets of 0.8300 and 0.8100.
The EUR/GBP posted a 0.6415 high before correcting. This has come back further than expected and places EUR/GBP at a cross roads now. A break below 0.5900 is going to open up a return to the all time low at 0.5635. If the level can hold intact then look for a move back to 0.6200 and 0.6400. For the EUR/JPY, the long term downtrend resumed as expected to post a 90.00 low before correcting. This rebound has been strong and is likely to neutralise the downtrend for a while. The USD/JPY target remains range bound for now within 101/112 boundaries. The lack of follow through to the downside though has allowed technical indicators turn around bullish again with a move to the top of the range likely to be the path of least resistance.

Eddie Murphy, Vice President, Treasury Citibank NA

EUR/USD: 0.90
GBP/EUR: 0.61
USDJPY: 103.33

Looking Back: Whilst we were more pessimistic on the euro than other forecasts - we clearly were not pessimistic enough. What became obvious as the quarter progressed was the high level of euro outflows to the US and their importance in guiding the exchange rate. In addition, the ECB ran into some credibility problems (particularly in Sept) with euro negative feeling engendered by comments from senior European politicians that seemed sympathetic towards a soft euro (Schroder).

Looking Forward: We would expect the US unit to loose some ground before Y/end. On a pure basis of competitiveness the dollar now appears to be overvalued and the high level of inflows(mentioned earlier)look unsustainable. However, we still worry for the Euro with the Qtr bracketed by the Danish Referendum and Niece summit (Dec17th) which could be EURO negative. We expect to see a continuation of the Japanese recovery. On a trade weighted basis the pound sterling is clearly overvalued -it’s just a question of which currency it falls against!

Aziz McMahon, Treasury Economist, Ulster bank Capital Markets

EUR/USD: 0.86
EUR/GBP: 0.62
USD/JPY: 112

Comments: The key issue facing foreign exchange markets going into the final quarter is whether G7 central banks can hold the line that they have drawn under EUR/USD around 0.85. Acting in concert, G7 central banks have a 100% record in halting trends in foreign exchange markets. In 1985, 1987, 1995 and in 1998 trends were halted and some cases sharply reversed by coordinated intervention. Equally, however, placing a floor under the euro is a greater task than faced in previous intervention battles, because central banks are fighting against a tide of real as opposed to speculative capital flows. In addition, while the authorities want to prevent the euro sliding indefinitely US authorities do not want to spark a sharp dollar reversal. These dynamics should keep the euro trading in an 0.85-0.90 range ahead of the New Year.

Niall O’Sullivan, Economist, Bank of Ireland Treasury and International Banking

EUR/USD: 0.86
EUR/STG: 0.61
USD/JPY: 110

Comments: The euro’s confirmed break below the psychologically significant $0.90 level towards the end of August accelerated the downward trend in the EUR/USD rate and added to the market’s lack of confidence in the currency. As a result September proved to be a particularly negative month for the euro. The euphoria that surrounded the dollar last month caught most market participants by surprise.

Looking forward: Going forward the threat of intervention should offer the euro some support over the short term. However, we question the longer term commitment of the US towards a stronger euro and US support for the intervention strategy could wane after the election.

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