Are major central banks repositioning rates amidst shifting global financial conditions?

Danske Research Team Danske Bank A/S

Broad repricing of major central banks

The past month, there has been a broad repricing (higher rates) of several central banks such as the Reserve Bank of Australia, Bank of Canada, Norges Bank and most notably the Bank of England While headline inflation has continued to move lower in most regions, core inflation remains sticky as seen by continued underlying price pressures in the service sector and labour markets remain tight In line with our expectation, the Fed opted to keep rates steady at the last meeting but delivered a hawkish message On the contrary, to fight a faltering recovery, the Chinese authorities have added more stimulus In Europe, optimism with respect to the growth outlook seems to be fading alongside the outperformance of European equities The European natural gas price has risen around 50 since the start of the month to around EUR 40 Mwh the highest level since the beginning of April which serves as a reminder that the European energy situation is fragile and sensitive to many different factors

Fade recent moves

The past month in FX markets has been characterised by moves in relative rates driving spot markets Currencies that have witnessed the biggest repricing higher of their central bank outlooks like CAD, AUD, NOK and GBP have all been among the top performers while SEK, USD and the EUR have been among the underperformers The JPY has suffered not only from a dovish Bank of Japan but also from the general rise in global yields This has lifted USD/JPY to new year highs EUR/USD has moved higher over the past week, trading just below the 1 10 mark

We maintain our strategic case for a lower EUR/USD based on relative terms of trade, real rates and relative unit labour cost s. Likewise, we see the prospect of the USD finding further near term support despite the Fed pause. Although we see the latest move higher in EUR/S EK as overdone, we remain bearish on the SEK over the medium term on the back of relative monetary policy, gloomy global growth out loo k globally and domestic headwinds from the housing market suggest. We have a negative stance on NOK the coming months given a mismatch in fi sca l FX transactions, weaker global sequential growth and tighter global liquidity conditions. Further out, we pencil in a move lower in EUR/NOK on both EUR strength fading and the NOK making a 2023 comeback.

A key assumption is that of a re tightening of global financial conditions Risks to this assumption primarily lie in the combination of a sharp drop in
core inflation and a more resilient global economy than what we pencil in.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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