−Markets quickly shook off the two-notch downgrade of Spanish debt and EUR/USD rose more than one big figure yesterday. EUR/USD is yet again back on the rise this morning and we currently see that investors increasingly use dips in market’s sentiment and in EUR/USD as an opportunity to bring down their short EUR positions in the FX market. We expect the unwinding of short EUR positions to continue and we also expect the Fed’s open-ended easing program to support EUR/USD going forward. We target EUR/USD at 1.35 in three to six months time and hence, we still like to buy EUR/USD on dips.
−We have seen a new move higher in EUR/DKK the last couple of weeks. It underlines that the inflow into Danish safe-haven assets have now come to a halt. We are now trading at a level for EUR/DKK where we should expect the Danish central bank to be actively supporting DKK by intervention. We still believe that the Danish central bank prefers to keep EUR/DKK slightly below the central parity at 7.46038. Hence, the upside for EUR/DKK at this level should be very limited. In our view the Danish central bank will act in a symmetric way.
Hence, first we need to see a currency outflow in the size of DKK 15-20bn and ten they will hike. Bottom-line is that we are moving in that direction. The need for safe-havens is falling day by day and eventually we will see rates going up in Denmark. It underlines that the potential for EUR/DKK going higher is limited. However, we continue to see FX Forwards in EUR/DKK moving to the right on improved risk sentiment (lower basis) and independent Danish rate hike expectations (relative rate channel).
−EUR/SEK broke above the 8.65 level and reached a three months’ high at 8.6735 after the lower than expected CPI data from Sweden yesterday. All in all the latest Swedish data support our view that the Riksbank will cut rates by yet another 25bp at the monetary policy meeting October 25. This is not yet fully priced and a further move higher in EUR/SEK is expected over the next couple of weeks and a test of 8.80 is likely.