Market overview

Peak expansion

As expected, markets have moved closer to our expectation of peak expansion and peak easy liquidity with momentum in global manufacturing growth slowing. Combined with the boost from stimulus fading, supply chain bottlenecks hampering production and the delta variant creating headwinds for the global economy, the risk of high inflation becoming more persistent and thus leading to stagflation has risen. The Fed was more hawkish than anticipated at the September meeting supporting our call that the Fed is about to start a tightening cy cle including both tapering and rate hikes. With the increasing likelihood of Chinese real estate developer Evergrande defaulting the Chinese credit market is showing deterioration in investor confidence adding to souring Asian sentiment with spill-over to global markets. The European gas market is under immense pressure due to supply shortage and rising demand pushing up natural gas and electricity prices.

Scandi-clouds in the horizon

The increasingly hawkish stance from the Fed continues to support our expectation of a stronger dollar and weaker Scandinavian currencies in H2. However, NOK has recently experienced a rally supported by Norges Bank initiating its hiking cycle raising policy rates by 25bp driving EUR/NOK below the 10.10 mark. EUR/SEK has also moved lower, but continues to trade in the recent 10.15-10.25 range. As expected, EUR/GBP has moved down to 0.85 since our last up date and has traded very narrowly within the 0.85-0.86 range.

We lower our profile on EUR/USD to target 1.10-1.15 in a year in favour of USD strength, as we expect further move towards a tightening of global liquidity conditions, lower PMIs, peak inflation concerns and further recovery in US jobs. We expect both EUR/SEK and EUR/NOK will move higher from here targeting 10.50 in 12M. EUR/GBP is expected to move down to 0.83 in 12M .

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