Danske Talk Long Term Targets

Danske Talk Long Term Targets

Danske Talk Long Term Targets

Danske Talk long term targets for EUR/USD

Growth

 US growth surprised on the downside in Q2 but recent labour market data has surprised on the upside. Private consumption should be supported in coming months despite the weak July retail sales. European data have been stronger than we expected given Brexit but the sharp slowdown in the UK is likely to impact the euro-zone with a lag. As such, we expect to see some softness in European data in the coming months.

Monetary policy

 The Fed was slightly more hawkish than expected at its July meeting. Fed chairman Janet Yellen is likely to give more clarity on her thinking regarding monetary policy at her Jackson Hole speech on 26 August. Danske believes that the Fed will wait until H1 17 to raise interest rates again. The market is pricing around 40% probability for a 25bp rate hike before end- 2016 which appears fair. Meanwhile, it expects that the ECB as a minimum will have to extend its QE purchases beyond March 2017 but it is unlikely that it will cut interest rates further.

Flows

 The market is short EUR/USD according to IMM data but not in stretched territory. As such, this increases the sensitivity of the cross to any impetus from relative rates.

Valuation. Both Danske’s PPP and MEVA models suggest the mid- 1.20s are ‘fundamentally’ justified and thus that the cross remains undervalued.

Forecast: 1.12 (1M), 1.12 (3M), 1.14 (6M), 1.18 (12M).

Risks

 Political risks in the euro-zone and in the US will weigh on markets in coming months. However, this can be both EUR and USD negative.

Conclusion

 Danske is adjusting up its EUR/USD forecasts to 1.12 in 1M (from 1.09) 1.12 (1.07), 1.14 (1.10) and 1.18 (1.14). These are the forecasts they had before Brexit. Brexit has not had the economic impact on the euro-zone as they expected. While the bank believes that there will be some slowdown in the euro-zone in coming months, it still does not expect that the ECB will cut rates. Political uncertainty could weigh on both the EUR and the USD.

Danske maintains its long-held view that the undervaluation of the EUR and the wide euro-zone-US current account differential are longer-term EUR positives. Hence, EUR/USD will reach 1.20 before it reaches 1.00.

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