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FX Forecast Update - Northern Lights Are On

Published 09/17/2018, 09:25 AM

EUR/NOK. Norges Bank hiking rates is to us an important fundamental trigger for the next leg lower in the overvalued EUR/NOK. We also think markets underestimate the Norges Bank hike outlook due to strong mainland growth, upside risks for the petroleum industries and a tight labour market amid a working Phillips curve. At the June meeting, Norges Bank sent an important signal to markets that a much stronger NOK is now justified. In other words, the currency has gone from being an argument against rate hikes to a situation where NOK weakness in itself is an argument for faster rate hikes. In addition, we think the four headwinds that have been the main culprits behind the NOK underperformance in recent months are about to stabilise or even become direct NOK tailwinds. We leave our forecast profile unchanged and target EUR/NOK at 9.40 in 1M, 9.20 in 3M (NYSE:MMM), 9.20 in 6M and 9.10 in 12M.

EUR/SEK. We now expect a 25bp Riksbank hike in December. This would be the first hike in seven years - a landmark in itself - and is not fully priced in. As such, it should be SEK supportive. However, we expect it to be a 'one and done', which leaves the repo rate at -0.25% for longer than the Riksbank plans, for most of 2019 at least. Consequently, earlier this month in Reading the Markets Sweden - 6 September 2018 we revised our outlook for EUR/SEK and thus see the cross at 10.20 in 3M, 10.20 in 6M and 10.30 in 12M. Near term, we expect the difficult parliamentary situation to keep EUR/SEK elevated and, therefore, we leave the 1M forecast at 10.50. We acknowledge the risk that Sweden is heading for an extra election and if this happens, our 3M target is probably too low.

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EUR/DKK. DKK is relatively more exposed to an escalation of the global trade war, as the Danish economy is small and very open and has significant exposure to global shipping. Furthermore, Denmark has net exposure to the stock market due to in particular the Danish Life and Pension (L&P) sector's large holdings of US and euro area stocks. This, in addition to the easier DKK liquidity situation and negative FX forwards, can help explain the recent rise in EUR/DKK above the 7.4500 level. We expect the pair to trade around 7.4550 on 1M, 7.4525 in 3M and 7.4550 on 6-12M.

EUR/USD . Downside risks from worries about Italian fiscal sustainability now seem much more limited near term but we still think the relative-rate support for the USD versus the EUR together with the lingering trade war will be prone to deliver pockets of USD strength during the autumn. This should leave EUR/USD in a range around 1.15 on a 3M horizon. Medium term, the euro capital outflows of recent years will fade as the first ECB hike draws closer. Alongside valuation, this is set to support EUR/USD in 6-12M. We have upped our near-term profile a little as we see less potential for Italy to weigh in H2 and now see EUR/USD at 1.15 in 1M, 1.15 (previously 1.13) in 3M, 1.18 (unchanged) in 6M, and 1.25 (unchanged) in 12M.

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