Danske Research Team
Danske Bank A/S
Today, the ECB meeting will take centre stage also in the FX market. If we are correct in forecasting a small rate cut from the ECB, it should take away some of the recent euro support and crosses like EUR/USD, EUR/JPY and EUR/GBP are all expected to edge lower. In general, it seems that EUR/USD has a hard time trading above 1.38 and with an expected recovery in the US labour market report tomorrow, a move below 1.3650 in EUR/USD is likely this week.
In Denmark, we will also watch the central bank’s reaction following the ECB meeting. If the ECB decides to lower the refinancing rate, we do not expect any immediate action from Danmarks Nationalbank (DN). The DN equivalent lending rate is currently 0.20%, which is likely to mark the immediate lower bound. If the ECB stays on hold, the focus is likely to return to the likelihood of DN intervening and raising interest rates unilaterally within the coming months. Note however, that the latest currency reserve figures showed that DN did not intervene in March to support the krone. Hence, the lack intervention over the recent period of krone weakening could be a subtle indication that the reaction function of DN has changed under the new governor Lars Rohde (see Research DKK – Vagueness in the reaction function, 20 March). There is still an historically high negative carry on long DKK positions against EUR in the FX forward market. However, if we are correct in forecasting more easing from the ECB, relative rates should, everything else being equal, be less of a negative factor for long DKK positions.
In respect of the other Scandies, we believe that primarily the NOK will be able to perform against the euro today as Norges Bank seems to be firmly on hold notwithstanding what the ECB does, whereas market expectations regarding a Swedish rate cut next week could be further boosted today. On the other hand, however, our short term financial model indicates that NOK/SEK is significant overbought. As highlighted in FX Market Update published yesterday, the cross currently trades 1.8 standard deviation above the model’s estimate of 1.067 and while we fundamentally see more upside in NOK/SEK, we prefer to stay sidelined as our models cannot fully explain the latest move higher. In the event of a correction lower we would, however, consider to go long NOK/SEK again.
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