Global real rates relief rally
Weaker than expected US economic data has sparked a global real rates relief rally. The prospect for lower real rates and more accommodative monetary conditions globally have boosted risk sentiment as we still find ourselves in a "bad news is good news"-environment. Oil prices have come lower over the last month following weaker global macroeconomic growth data, which could be an indication that global oil demand has started to wane. While the rest of G10 central banks seem firmly on hold with markets now expecting cuts from the Fed in 2024, markets are pricing an elevated probability of Norges Bank and Riksbanken delivering hikes at their upcoming meetings. While we expect two "unchanged" decisions, we acknowledge that both are close calls. The war continues between Hamas and Israel, but geopolitics have largely stepped into the background as a market theme.
The cyclical sensitive currencies CEE, NOK and SEK have been the big winners following the global real rates relief rally post weaker-than-expected US figures. In line with our expectation, EUR/USD has rallied the past month on the back of a turnaround in US economic data releases with the cross breaching the 1.08 mark. JPY has failed to strengthen significantly on the back of lower global yields and a further tweak of the yield curve control with USD/JPY trading just below 152.
Outlook: EUR/USD topside risk, scandies strength to subside
We expect EUR/USD to trade at lower levels on a 6-12M horizon based on relative terms of trade, real rates (growth prospects), and relative unit labour costs. That said, in the near-term we still believe in a further upside potential for the cross, primarily due to weaker-than-expected US economic data and positive risk appetite. For the very near-term we cannot rule out more NOK strength but we highlight that we see such strength as temporary and still pencil in EUR/NOK to breach the 12.00 figure in the coming 6M. Akin to NOK, we could see further SEK strength in the near-term on risk sentiment, seasonality and short-term valuation. However, with cyclical headwinds still in place for the coming 6-12M we remain medium-term bearish on the SEK.
Risks to our forecasts primarily lie in the combination of a sharp drop in core inflation and a more resilient global economy than what we pencil in. Also a much harder landing than what we pencil in would require a sharp easing of global monetary conditions which would likely entail a much weaker USD after an initial squeeze higher.
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