EUR/NOK . The Q1 NOK rally has suffered a serious setback over the past month on the back of external developments. Initially, a dovish Riksbank triggered the EUR/NOK move higher. However, the primary single driver behind NOK weakness has been lower global inflation expectations on the resurfacing of the trade war and relatively hawkish central banks. As a result, we have seen a disconnect between EUR/NOK spot and model estimates based on relative rates, oil prices and risk sentiment proxies. This alone suggests eventual NOK rebound potential but the near-term outlook for external drivers does not look too supportive. As a result, we lift our 1M and 3M (NYSE:MMM) forecasts to 9.70 (from 9.50) and 9.60 (was 9.50), respectively. Fundamentally, we still emphasise that as long as the global economy does not fall out of bed, the NOK is now too weak for Norges Bank to fulfil its inflation target. Therefore, alongside a higher oil price and long-term NOK valuation, we still pencil in a lower EUR/NOK at 9.40 (previously 9.30) in 6M and 9.30 (unchanged) in 12M.
EUR/SEK. We think that it is in monetary policy expectations where one could eventually get a trigger for a SEK turnaround. Such a turnaround is hard to see though, given that Swedish inflation will probably force the Riksbank to stay on hold for longer. This said, the market has priced out almost all probability of a hike this year. Unless one expects rate cuts (we do not), a positive driver for EUR/SEK may abate going forward. More generally, the SEK still stands out as one of the most attractive funding currencies and this could continue to push USD/SEK higher as long as carry remains a theme. On the other hand, EUR/SEK is somewhat overbought relative to our short-term models. Therefore, on balance, we raise our 1M forecast to 10.70 (previously 10.60), 3M to 10.80 (previously 10.60), 6M to 10.90 (previously 10.70) and finally 12M to 11.00 (previously 10.80).
EUR/DKK. Weak equity markets, the unresolved trade war and a large discount in FX forwards are likely to keep EUR/DKK elevated over coming months - at 7.4650 in 1M and 7.4630 in 3M (from 7.4590). On a 6-12M horizon, we expect a trade deal to be struck and the global macroeconomic backdrop to strengthen, which we in turn we expect to send EUR/DKK back below the central rate to 7.4590 in 6M and 7.4550 in 12M.
EUR/USD. The market is looking for more than promises from the ECB before selling the euro from an already short position despite weak PMIs and deteriorating inflation expectations. The Fed is not much easier to read but the pricing of Fed cuts has lent some support to EUR/USD. We forecast EUR/USD at 1.12 in 1M and 1.13 in 3M, as we look for a status quo in the current weak economic environment. In 6M and 12M we stick to our forecasts of 1.15 and 1.17 as the China-led recovery, along with a US-China trade deal, should lend support to EUR/USD.
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