The Situation Of The EUR/JPY Pair Is Quite Good | The Danmarks Nationalbank (DN) Will Follow The European Central Bank (ECB)
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EUR/JPY
Current spot: 141.16
• EUR/JPY has been holding up quite well despite the global bear market in risk assets. Our bias would be that EUR/JPY struggles to sustain a break above 145 in an environment where central banks are actively looking to slow aggregate demand.
• For the European Central Bank, we are looking for a 75bp hike in October, perhaps 50bp in December and another 25bp in 1Q23. The ECB will also have to think about quantitative tightening in its Asset Purchase Programme portfolio, which may create problems for the eurozone’s peripheral bond markets.
• Typically, the Japanese have been more interventionist than the eurozone and on that basis – and given the forthcoming eurozone recession - EUR/JPY risks look skewed lower the next six months.
EUR/GBP
Current spot: 0.8763
• Sterling has been driven by the fiscal credibility story. And it is interesting to note that the 10-year Gilt-Bund spread is struggling to narrow inside 200bp again – suggesting credibility is hard won and easily lost.
• The Chancellor’s U-turn on the upper income tax bracket does little to assuage fiscal concerns. It only saves around £2bn compared to what could be £200bn of Gilt supply in FY23/24. Instead, the Chancellor will somehow need to find spending cuts or more likely tax increases – U-turn on energy windfall tax?
• Clearly this is a challenging picture and combined with a difficult global environment, sterling risks remain skewed lower.
EUR/NOK
Current spot: 10.35
• Norway’s krone has dropped by more than 6% this past month, with its low-liquidity character leaving it highly exposed to the rocky risk environment.
• A decisive turn in the krone will need to wait for a recovery in risk assets, which may only occur in the new year. The OPEC+ output cuts may suggest a slightly better outlook for oil currencies (in the crosses) into year-end, but not enough to trigger a NOK recovery at this stage.
• Norges Bank should stick to the rate hikes it signalled at its latest meeting: 50bp in November, 25bp in December. There is some room for a hawkish surprise, but FX implications are small.
EUR/SEK
Current spot: 10.95
• Riksbank Governor Stefan Ingves recently said the Bank must keep a comfortable distance to the ECB with rate hikes, not least because the Bank is explicitly seeking a stronger krona.
• In practice, rate hikes may still prove largely ineffective to strengthen the krona given the challenging risk environment. Slowing the pace of FX reserve-related SEK selling could actually do more to help SEK, but the central bank has signalled reluctance here.
• There is an elevated risk that EUR/SEK breaks above 11.00 before the end of the year as the energy crisis deepens and risk assets remain pressured. We look for a gradual 2023 recovery in SEK, but the timing remains highly uncertain.
EUR/DKK
Current spot: 7.4383
• For the first time in 2022, Danmarks Nationalbank jumped back into the currency market, selling DKK 23bn to weaken Denmark’s krone in September. This is half the size of the last FX intervention (47bn in December 2021).
• For now, it looks like DN will stick to replicating the size of ECB rate increases and intervening to support EUR/DKK. However, we expect more EUR weakness into the winter and this may start to cast doubt over the sustainability of FX intervention.
• We still see a non-negligible risk that DN hikes rates by less than the ECB (10bp would be a start) in one of the coming meetings. This risk is likely higher if the ECB sticks to large hikes.
This article is a part of a report by ING Economics available here.
Disclaimer
This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
