Danske Research Team
Danske Bank A/S
Today we publish our new FX Forecast Update. We have lowered our 3M target for EUR/USD a bit, but we still expect the cross to trade slightly higher EUR/USD on a 3M horizon (we target 1.40 in 3M) as it takes time before the ECB will deliver more easing. Hence, euro positive current account and capital flows will be able to dominate EUR/USD on a 3M horizon. The latest FOMC minutes also revealed that the FOMC is in no hurry to hike rates when tapering is done. All in all, a new trend lower in the cross should probably not be expected before the ECB starts a new easing round. Thus, relative monetary policy will not in our view be able to push EUR/USD lower before on a 3 to 6M horizon. However, comments from Bundesbank's Weidmann yesterday that the ECB should discuss what assets a QE programme should buy underlines that eventually the current support to EUR/USD will reverse. We target EUR/USD at 1.36 in 6M (previously 1.37) and 1.30 in 12M (previously 1.32).
The low Swedish inflation and the higher-than-expected Norwegian inflation numbers yesterday once again underlined that monetary policy in Sweden and Norway is on a divergent path at the moment, putting further upward pressure on NOK/SEK. From a technical point of view the next target is 1.1115. Note however, that our short-term financial model cannot explain the latest move higher as the fair-value estimate is currently at 1.085 for NOK/SEK. But all in all we continue to see upside for the cross.
Yesterday at 16.00 CET the sold 0.85 NZD/USD call option that we recommended in FX Market Update: Sell 1M NZD/USD 0.85 call option; We take early profit on long EUR/PLN call position (12 March) matured and the trade generated a loss of 1.50% (spot ref.: 0.8696). We recommended to sell 1M call option ahead the RBNZ meeting on 12 March as market pricing of future rate hikes (more than 100bp within 12 months) in our view appeared to be too aggressive. However, RNBZ delivered both the expected rate hike and a relative hawkish rhetoric indicating that the central bank in fact could hike rates more aggressively than market pricing indicates. This has since supported the NZD and while our short-term financial model still indicates that NZD/USD is significantly overbought, trading 2 standard deviations above model’s fair value estimate of 0.846, we expect the cross to stabilize around the 0.86 level in the coming months.
In Research DKK: Another year of negative rates ahead (11 April) we present five arguments why Danmarks Nationalbank will not increase interest rates independently the coming year. We expect EUR/DKK to remain elevated at 7.47 on 3M, while further easing from the ECB will reduce the negative carry on
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