FX Forecast Update July 2018: Trade war to keep USD bid for now

FX Forecast Update: Trade war to keep USD bid for now

Majors. The trade war has returned as a key USD driver and, in our view, further escalation, which remains our base case, will tend to be USD supportive due to the less open US economy, which is set to lose less than those of its peers on a decrease in global trade. This said, recent Fed worries should keep a lid on USD strength but will also tend to make, notably, the ECB reluctant to commit to a tightening cycle.

EUR/NOK. At the June monetary policy meeting, Norges Bank confirmed market expectations of a September rate hike, which, in our view, marks an important fundamental trigger for the next move lower in EUR/NOK. In the very near term, the global environment of weaker growth and trade war fears alongside improved structural NOK liquidity and 'summer trading' should limit the short-term potential. We 'roll' our forecast profile to 9.40 in 1M (unchanged), 9.20 in 3M (9.30), 9.20 in 6M (9.30) and 9.10 in 12M (9.20).

EUR/SEK. We look for a wider range in EUR/SEK over the summer, which we addressed in a sold strangle recommendation (see Reading the Markets Sweden, 25 May). While we did argue for a temporary dip in EUR/SEK as inflation appeared set to meet and even breach the Riksbank's expectations for a couple of months yet, this is not the case anymore. After the Riksbank raised its CPIF forecast in July, it effectively opened the door for inflation disappointments instead. We still think the Riksbank will postpone the first hike beyond 2018 and that this will weigh on the SEK later in H2. Hence, in a 3-6M perspective, the cross is primarily a buy on dips in our view. Apart from monetary policy, the slowing housing market domestically and the trade war globally are two other headwinds for the SEK. Cheap valuation fundamentally could be seen as a SEK-buying argument though for those with a longer term horizon. On balance, we set our 1M and 3M forecasts at 10.40 (previously 10.20), 6M to 10.50 (previously 10.40) and leave our 12M forecast at 10.20.

EUR/DKK. DKK is relatively more exposed to an escalation of the global trade as the Danish economy is small and very open and has significant exposure to global shipping. Furthermore, Denmark has net exposure to the stock market due to in particular the Danish Life and Pension (L&P) sector's large holdings of US and euro-area stocks. This, in addition to the easier DKK liquidity situation, can help explain the recent rise in EUR/DKK above the 7.4500 level. In turn, we revise our EUR/DKK forecasts and now expect the pair to trade around 7.4525 in 1-6M buoyed by the factors above, before falling back to 7.4475 in 12M, as DKK remains well supported by strong fundamentals.

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