EUR/NOK. March marked a perfect storm for the NOK, as speculative positioning made EUR/NOK highly vulnerable to the repricing of the ECB, the oil price dropped on tighter monetary policy/OPEC comments, and Norges Bank provided a more dovish rate path than markets had pencilled in. Meanwhile, a large part of these drivers have now reversed without having a positive effect on the NOK. As a result, EUR/NOK now seems overvalued according to our short-term financial models. More fundamentally, accelerating above-trend growth together with a narrowing negative output gap is an ideal cocktail for an undervalued currency like the NOK. We still expect EUR/NOK to move gradually lower and leave our forecasts unchanged, still targeting 8.70 in 12M.
EUR/SEK. We have opted to lift our 1M target to 9.60 (prev. 9.50) ahead of the Riksbank's April meeting, where we think it will try to avoid sending a hawkish message: a signal to end QE after June (i.e. a hawkish tilt) is likely to come with a postponement of the first rate hike by at least one quarter (i.e. dovish tilt). The dividend season could remain a SEK headwind for the next few weeks, but this should wane in May. All in all, we expect EUR/SEK to move slowly and gradually lower over the forecast horizon as valuation and relatively strong fundamentals kick in. We keep our 3, 6 and 12M forecasts intact at 9.40, 9.30 and 9.20, respectively.
EUR/DKK. Danmarks Nationalbank (DN) was in the market again in March selling DKK6bn in FX intervention to cap the EUR/DKK lower bound. In our view, the market is likely to be reluctant to buy EUR/DKK this year, with uncertainty attached to the outcome of political events in Europe and DN reluctant to cut rates. We see only limited upside potential for EUR/DKK from reports that the ECB is mulling over a rate hike before its bond purchases end. We still forecast EUR/DKK at 7.4400 in 1-12M.
EUR/USD. We continue to look for the cross to be range-bound near term, trading in the lower end of the 1.04-1.10 interval on a 1-3M horizon as political risks and support from pricing of a USD-positive policy mix dominate. Towards year end, we do, however, expect to see a gradual pick-up in the cross, targeting 1.09 in 6M as the Fed adopts a cautious approach to 'quantitative tightening' (i.e. go easy on tightening) and markets have more clarity on how far the Trump administration will get on its expansionary fiscal agenda. Near term, key risks include the French presidential election and miscellaneous Trump initiatives. Longer term, as the cross remains substantially undervalued we stress that it will take a continued ECB-Fed divide to keep the cross below 1.10. Notably, any signals from the ECB that rate hikes are underway could be a catalyst for EUR/USD upside, and we do not expect a drop in euro-zone inflation and a QE extension from the ECB to weigh significantly on the single currency. We still target 1.14 in 12M.
EUR/GBP. With UK prime minister May now calling for an early general election in June - conditional on approval by the House of Commons which she will likely get - GBP is eyeing some relief from Brexit woes as the sample space for UK-EU relations has suddenly widened again with notably a chance now that Brexit may be softened (or cancelled altogether should the May government be ousted). Given May's lead in the polls the most likely outcome is however that she will receive the more broad-based backing she is seeking heading into the autumn negotiations on Brexit. Our base case thus remains that May will stay in power and negotiate a 'decent Brexit' (neither too hard nor too soft), but the probability of other outcomes has clearly risen with today's election call. Hence, in our main scenario that May resumes negotiations EUR/GBP should be in for a level shift higher again post a June election. In this outcome we look for EUR/GBP to be range-bound for an extended period of time, trading in the 0.84-0.88 interval over the coming year, and we do not expect the pound to fight back to any great extent on a 12M horizon. Thus we have adopted a flat forecast profile with EUR/GBP trading around 0.86 level on a 1-12M horizon. But near-term risks are to the downside as GBP shorts are being covered on the heightened uncertainty, and needless to say, volatility will likely stay elevated.
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