FX Talking - EUR/DKK, USD/CAD, AUD/USD | ING Economics
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EUR/DKK
Denmark eyeing the end of negative rates
Current spot: 7.4414
• Denmark’s National Bank stuck with zero FX interventions in June, and EUR/DKK has continued to hover around the 7.4400 mark without signs of the peg coming under pressure.
• We expect 100bp of tightening by the ECB before the end of the year, and currently see no reasons for the DN to diverge significantly from this pattern. This means that Denmark looks set to exit negative rates for the first time since 2014 by this fall.
• We believe that any fresh pressure on EUR/DKK should be countered predominantly with FX interventions, and an intentional further widening of the EUR-DKK short-term rate differential may only be a last-resort move.
USD/CAD
A bit more pain before a CAD rebound
Current spot: 1.2991
• We still think that among G10 commodity currencies, CAD remains the least vulnerable. As markets trade increasingly in line with recession fears, North America’s lower exposure to global headwinds is good news for CAD. The commodity story should also offer some help, barring another oil correction.
• This doesn’t mean that there are no upside risks to USD/CAD: unstable risk sentiment and USD strength may remain themes for the short-term. A temporary spike to 1.31-1.33 is possible, but strong fundamentals suggest CAD will rebound fiercely once sentiment stabilises.
• The Bank of Canada’s steep tightening path (we expect a 75bp hike in July) may pay dividends for CAD in the medium term.
AUD/USD
Short-term downside risks persist
Current spot: 0.6812
• The RBA surprised on the hawkish side with a 50bp rate hike, but the FX impact of monetary policy has been negligible, and this should continue to be the case throughout a summer of hikes.
• AUD should continue to be driven almost solely by external drivers. Uncertainty around China’s outlook remains elevated despite recent stimulus from Beijing, and potential fresh curbs on steel production could increase downside risks for iron ore prices.
• Still, the AUD/USD short-term outlook should remain mostly a function of global risk sentiment dynamics and USD swings. We could see a slip to 0.66-0.67 in the coming weeks, but are sticking with an upward-sloping forecast profile for year-end - in line with other high-beta currency pairs.
NZD/USD
RBNZ considering a dovish rethink?
Current spot: 0.6166
• The RBNZ should hike by another 50bp in July, in line with latest projections and market expectations. However, New Zealand’s housing market dropped by the most since 2009 in 2Q22 (-2.3% QoQ) and there are multiple signs – especially on the consumer side – that the economy is slowing significantly.
• We think there is an increasing risk of the RBNZ having to review its rate profile lower in August, or anyway by the end of the year.
• That can have an impact on AUD/NZD, making a sustainable return to sub-1.10 levels less likely. But when it comes to NZD/USD, it’s still all about global factors, and a drop below 0.6000 in the near term surely can’t be excluded.
Emerging markets
EUR/PLN
NBP underdelivers in tightening in July, PLN at risk.
Current spot: 4.7865
• NBP failed to meet expectations and hiked rates by 50bp in July instead of 75bp. While we still expect the MPC to gradually move the reference rate to 8.5%, market bets for future hikes have diminished. The unsupportive external environment (likely recession in Europe, strong dollar) puts the zloty at risk. We don’t consider EUR/PLN moving back to 5 (its peak after the Russian invasion shock) as a baseline scenario, but certainly possible.
• Longer term prospects are largely muted, as the deterioration of Poland’s external balance largely offsets NBP rate hikes. EUR/PLN moving to 4.60 would require both a significant improvement in CEE sentiment and further NBP policy tightening.
EUR/HUF
Forint remains in the grip of external factors
Current spot: 407.51
• EUR/HUF reached a new high at 417 in July, keeping the central bank busy. With several decisive steps, it raised the effective interest rate to 9.75%.
• The government has also stepped up to the plate, sending messages resonating well with nervous markets. With some positive comments on the Rule of Law debate and energy supply security, EUR/HUF moved to the vicinity of 400.
• We continue to watch headlines from Brussels signalling a turnaround in the EU funds dispute that should unlock the hidden potential of the forint. A second round of recovery could be fuelled by the CEE’s highest positive real interest rate in 1H23.
This article is a part of the report by ING Economics
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