Global FX markets: With political risks in Europe abating for now, currency market focus could increasingly turn to the global cycle where the risks from a weaker China and Fed determinedness to normalise policy could endanger the recovery. This entails risks for cyclical currencies such as commodity currencies, it also points to more volatile volatility ahead. Notably, EUR crosses could come under pressure near term as, in our view, the ECB is unlikely to grow as hawkish as expected.
EUR/NOK. We see no imminent triggers for a NOK turnaround as global business-cycle weakness will remain a NOK challenge, while Norges Bank is unlikely to turn hawkish in June. Also, we think the latest oil price rise reflects markets once again pricing in an extension of an OPEC output freeze agreement. The Norwegian normalisation story, valuation and real rates remain clear NOK positives but the positive effects are likely to be that of an H2 17 story. In the near term, a turn in the European business cycle limits the EUR/NOK upside potential. We lift our EUR/NOK forecasts to 9.30 in 1M, 9.30 in 3M (previously 8.90), 9.10 in 6M (8.70) and 9.00 in 12M (8.70).
EUR/SEK. Further Riksbank stimulus cannot be ruled out if inflation disappoints but we do not expect this. It seems to us that the Riksbank is getting better traction in the currency market than the money market, while the krona is arguably weaker but the money-market curve is still steeper than the Riksbank path. As long as the Riksbank and the ECB stay soft, this is likely to hinder any meaningful rebound in the SEK. Still, we think that EUR/SEK has gone a little bit too far and, given the underlying macro picture and valuation, we maintain a modest decline in the EUR/SEK forecast. We keep 1M at 9.60 and raise 3M, 6M and 12M to 9.50 (previously 9.40), 9.50 (9.30) and 9.30 (9.20).
EUR/DKK. Danmarks Nationalbank (DN) did not intervene in the FX market in April in the final weeks before the French election. The Danish current account surplus is growing again and is currently on pace to exceed 9% of GDP this year, adding strong fundamental support to DKK. Following the French election, EUR/DKK has moved up to around 7.4400 - a level we consider to be the 'new normal' for EUR/DKK. We forecast the pair at 7.4400 in 1-12M.
EUR/USD. While the ECB could become a little more hawkish near term, the Fed is set to announce a 'quantitative tightening' scheme. This should support the USD somewhat near term. However, we stress that the significant move to watch out for on a 12M horizon is likely to be fuelled by an ECB shift away from further easing and, longer term, we maintain that fundamentals such as valuation and current-account balances remain supportive of the cross. We now target the pair at 1.07 in 1M, 1.09 in 3M (previously 1.06), 1.11 in 6M (1.09) and 1.16 in 12M (1.17).
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