A ‘Sintra accord’ for the FX market? Recent central bank discussion – notably at the Sintra ECB policy forum – could mark the end of the currency war of recent years and allow for broader USD weakness ahead as central banks embark on the path to ‘normalisation’.
Cross-country differences in wage-price dynamics – and not least central bank perceptions of these – are set to become crucial for the FX market, as this will determine movements in real-rate differentials ahead.
Near term, this heightens the risk of a Bank of England rate hike and associated GBP appreciation, it points to continued upside potential in EUR crosses as the ECB has now revealed its worries in terms of falling behind the curve, and it looks set to keep JPY weak for some time as the Bank of Japan has seen little evidence of price pressure despite low unemployment.
Notably, it also suggests that the Scandies will be range-bound for a while, as neither Norges Bank nor the Riksbank appear ready to let their currencies appreciate materially. In that sense, the Scandies have yet to sign any sort of ‘Sintra accord’.
Longer term, as more central banks are set to follow the Fed in withdrawing stimulus, fundamental factors are set to play a larger role in FX moves, which should weigh on USD vis-à-vis not least EUR and the Scandies.
For EUR/SEK, we have lowered our forecasts for the pair to 9.60 in 1M, 9.50 in 3M (9.60 previously) and 9.40 in 6M (9.50) while keeping our 12M forecast at 9.30. With respect to EUR/NOK, we roll our 1M forecast to 9.30 but leave the rest of the profile unchanged at 9.30 in 3M, 9.10 in 6M and 9.00 in 12M. We still forecast EUR/DKK at 7.4400 on 1-12M. On EUR/USD, we continue to see the cross in a range of plus/minus a few big figures around 1.13 on a 1-3M horizon and still see the cross at 1.18 in 12M on valuation arguments. In USD/JPY, we have lifted our 1-3M forecasts, both from 112 previously to 114, as we expect relative monetary policy to provide support, but still target the cross at 116 in 6-12M. Finally, we see EUR/GBP continuing to trade in the 0.87-0.90 range in coming months, targeting 0.88 in 1-3M (0.87) and stress that risks are skewed to the downside relative to our 6-12M forecast of 0.87.