Don’t chase EUR/JPY strength
Current spot: 140.83
- High energy prices and a hawkish ECB have seen the EUR/JPY rally extend. The ECB has now pre-committed to a 25bp hike in July and at least another 25bp hike in September. The BoJ remains resolutely dovish. Japanese officials would like to slow JPY depreciation through means of intervention – though EUR/JPY may have to be closer to 150 for intervention to be seen.
- The reason we do not like forecasting a much higher EUR/JPY is the risk environment. Higher real rates around the world will challenge equities and could generate some JPY outperformance.
- How ECB copes with fragmentation risks (eg, BTP-Bund spread moving to 250bp) remains to be seen – and may weigh on EUR.
We are not in the ‘end of days’ camp for sterling
Current spot: 0.8567
- There has been a lot written recently about sterling being a terrible currency. Yes, it has weakened about 4% this year on a trade-weighted basis, but that is partly down to a very strong dollar. We are not as bearish as some and do not expect the political noise of the current Tory government to do much damage – largely since the Tories have a large majority.
- And the euro does not look particularly attractive either at the minute – both currencies under pressure based on their growth credentials and stagflationary challenges.
- But the re-assessment of the BoE cycle looks a clear risk. EUR/GBP resistance at 0.8600 will come under increasing pressure.
We are changing our forecast
Current spot: 1.0380
- For many years the Swiss National Bank has fought CHF strength and, in the process, acquired about CHF800bn in FX reserves. But this was in a deflationary environment. The SNB has been sounding more hawkish recently and spelled out that it needs to keep the real exchange rate stable to fight inflation. Given low inflation in Switzerland, a stable real CHF requires nominal CHF appreciation of roughly 4% per annum.
- With massive FX reserves, the SNB certainly has the firepower to keep a lid on EUR/CHF (near 1.05) and engineer it towards 1.00.
- Of course, the risk is of us being whip-sawed with views here, but stagflation in Europe doesn’t bode well for the euro either.
More room to benefit from oil’s rally
Current spot: 10.29
- The short-term outlook for the krone remains tied to global market volatility, as NOK is the least liquid currency in G10 and suffers from market turmoil more than its peers, especially if that is linked with a global tightening of financial conditions.
- At the same time, the EU-Russia standoff on oil trade and higher crude prices means more long-term benefits for the Norwegian economy. We think the commodity factor will prevail beyond the short-term and drive NOK higher in the remainder of the year.
- Norges Bank recently hinted at an acceleration in monetary tightening; we expect it to bring the policy rate to the 2.00% mark by the end of the year, which should also help to lift NOK.
We expect a 50bp hike in June by the Riksbank
Current spot: 10.60
- We have updated our Riksbank call and now expect a 50bp hike in June, followed by two 25bp hikes in September and November. This is largely in line with market expectations, which however appear too hawkish on the terminal rate side.
- We expect a faster QT to start doing the heavy lifting later in the tightening cycle, and the policy rate to peak at 1.75-2.0%, but any dovish re-pricing may only be a concern for SEK in early ’23.
- The short-term rate differential should reconnect with FX in 2H22, in our view, driving EUR/SEK depreciation. In the coming weeks, risk sentiment and incoming European data will remain the key drivers of SEK. Surely, short-term downside risks for SEK persist.
DN and ECB likely to move in tandem
Current spot: 7.4386
- Danmarks Nationalbank stuck with zero FX interventions in May, as EUR/DKK has appeared quite solidly anchored to the 7.4400 mark recently.
- The focus is shifting to the timing of rate hikes in Denmark. We see no reasons for now to expect a diverging tightening path between the DN and the ECB. After all, the October 2021 cut in the Danish repo rate has created a safety cushion between DKK and EUR rates that should keep limiting EUR/DKK downside.
- Should the pair face fresh pressure, we still think FX interventions will remain the preferred tool rather than opting for a less dovish policy compared to the ECB. We target 7.45 in 4Q22.
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