EUR/USD. We lower our EUR/USD forecasts to 1.05 in 1M (1.09 previously), 1.04 in 3M (1.08), 1.08 in 6M (1.11) and 1.12 in 12M (1.15). Over the next one to three months, we expect the prospect of a more hawkish Fed, expectations of a 'Homeland Investment Act 2' and rising European political risks to drive EUR/USD lower. Longer term, we maintain our long-held view that the undervaluation of the EUR and the wide eurozone-US current account differential are EUR positives. Historically, larger US fiscal deficits if not accompanied by an increase in real interest rates are bearish for the USD. In addition, the Fed may become worried about the strength of the trade-weighted US dollar, which will mitigate rate increases.
EUR/NOK. As expected, over the past month we have seen EUR/NOK edge higher, not least driven by the oil price erasing the September gains. Going into year end, when seasonality tends to be NOK negative, the development in the oil price will remain a key driver. For 2017, we still see a fundamental story supporting a lower EUR/NOK on growth, real rate differentials and a higher oil price. The Republican victory in the US will, in our base case, not be a game changer for the NOK but the Donald Trump presidency has added another risk scenario to our profile.We now forecast EUR/NOK at 9.20 in 1M (previously 9.10) but leave unchanged our 3M, 6M and 12M forecasts of 9.20, 9.00 and 8.80, respectively.
EUR/SEK. We believe the Riksbank will not only extend the QE programme in December but also cut the repo rate by another 10bp. The former is widely expected and probably relatively SEK neutral, particularly as it is likely to be a taper extension. However, the latter is not yet priced in, so it poses an upside risk to EUR/SEK and is the main reason we have revised our EUR/SEK forecast profile higher. Crucial for our repo rate call is (1) the ECB extending its QE and (2) our below-the-Riksbank inflation forecast for November. If the ECB does not deliver or if inflation surprises on the upside, we may be in for an earlier SEK rebound than suggested by our forecasts: 9.90, 9.70, 9.40 and 9.30 in 1M, 3M, 6M and 12M.
EUR/GBP. We have revised down our 1M and 3M forecast to 0.86 (previously 0.90) in 1M and 0.88 in 3M (0.91) as the market is pricing in less negative impact on UK after Brexit. In the near term, we could see a further GBP rally given the heavy short GBP positioning but expect the cross to settle in the 0.83-0.88 range in the near term. However, weak UK fundamentals still justify a weak GBP to offset the negative consequences of Brexit and we expect renewed pressure on GBP in 3-6M in the run-up to when the UK government is likely to trigger Article 50. We target EUR/GBP at 0.90 in 6M (0.92).
USD/JPY. We have lifted our USD/JPY forecast as the case for higher yields on 10-year US treasuries and higher commodity prices has strengthened and is assumed to be supportive factors for USD/JPY. In the short term, we expect the cross to remain supported by improved risk appetite and expectations of a Fed rate hike in December and we now target USD/JPY at 113 (104) in 1M and 115 (106) in 3M. Longer term, we expect USD/JPY to increase further among others driven by higher US bond yields and we now target USD/JPY at 115 (106) in 6M and 115 (106) in 12M.
USD/CNY. The CNY has weakened faster than expected versus the USD. The move reflects USD strength more than CNY weakness, as the USD has appreciated against most currencies. The CNY has moved broadly sideways versus the EUR in the past few months. To reflect the view of a stronger USD, we revise higher our USD/CNY forecast to 7.0 in 3M (previously 6.75), 7.1 in 6M (6.85) and 7.3 in 12M (7.1).
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