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#Market Strategy — 17.07.2018

Monthly Currency Outlook

Guy Ertz

For euro based investors, Swedish and Norwegian currencies offer opportunities.

United States dollar

The United States dollar is slightly weaker, having started June at 1.17 versus euro and currently standing just below 1,18 at the beginning of July. However, the US dollar path has not been linear. The greenback started the month of June on a weaker note as some European Central Bank (ECB) officials underlined their confidence regarding the Eurozone economy. The US dollar subsequently rallied versus euro to 1.156 just as the ECB was more dovish than investors expected. Over the remainder of the month, the euro recovered towards 1.18 alongside lower political risk in Europe. We maintain our view that the US dollar should depreciate over the next 12 months as economic momentum stabilizes in Europe, the ECB gradually leans towards policy normalization and structural factors weigh on the USD. Moreover, while in recent months the US dollar has benefited from higher trade tensions as outflows from emerging markets were seeking safer havens, it is far from certain that higher trade tensions could not be USD negative. We target the EUR/USD at around 1.19 in 3 months (value of 1 EUR) and at around 1.22 in 12 months.

United Kingdom pound

The British pound remained in a tight 0.87-0.88 range for most of the month of June, weakening a bit after the release of economic data but being supported after the European Central Bank and the Bank of England meetings. It broke this trading range to the upside in the very last days of June with the Brexit process coming to the fore as EU chief negotiator and Moody’s underlined the slow Brexit negotiation progress and the British government finalized a EU-UK divorce proposition. In brief, we think that the United Kingdom should underperform other G7 economies due to the persistent Brexit uncertainty. This, coupled with our belief to see Brexit taking a “soft” shape lead us to see the EUR/GBP trading around 0.88 on both 3-month and 12-month horizons (value of 1 EUR).

Australian dollar & New Zealand dollar

In 2017 and 2018, tailwinds from the strong global growth and robust demand for the respective commodities they produce have benefited Australia and New Zealand’s economies. As we expect the strong global economic backdrop to endure and commodity prices to remain relatively high, we have updated our forecasts for the Australian dollar and the New Zealand dollar to reflect our positive global macroeconomic outlook. In addition, central banks that will probably gradually turn more hawkish and our expectations for a weaker trade weighted US dollar are likely to support both currencies. Our AUD/USD targets now stand at 0.76 and 0.80 in 3 and 12 months respectively (from 0.78 and 0.76) and our NZD/USD targets at 0.70 in 3 months and 0.72 in 12 months (from 0.70 for both).

Swedish krona & Norwegian krone

Since June 1st, the Norwegian krona (NOK) slightly appreciated (0.9%) versus euro while the Swedish krona (SEK) was broadly unchanged. In Norway, the Norges Bank (central bank) reiterated its message that it may start raising interest rates in September. In Sweden, two sets of events balanced themselves. On one hand, inflation came above the 2% central bank’s target and the Riksbank delivered a positive outlook regarding inflation, raising the odds that interest rates will be hiked later in 2018. On the other hand, the fact that Sweden is an open economy and relies on external demand had rising trade tensions weigh on the SEK. As we expect the two Nordic economies to continue to perform well in 2018 and as inflation is likely to pursue its upward trend, we see a strong case Nordic central banks to turn more hawkish. This should feed to the currencies via higher bond yields and diminished investor’s cautiousness towards both currencies. We target the EUR/NOK at 9.40 in 3 months and 9.10 in 12 months while we expect the EUR/SEK to reach 9.80 in 3 months and 9.30 in 12 months.