16 Feb 2015
EUR/DKK a sell in this quarter – JPM
FXStreet (Barcelona) - The JP Morgan Team comments on the central bank policy impact on FX space, and shares the outlook for USD/JPY and EUR/DKK.
Key Quotes
“Central bank balance sheets are very much in focus for currencies, although now perhaps due to concerns about the sustainability of certain policies.”
“Although purists tend to decry central bank participation in markets, it is hard to deny that unprecedented involvement like QE has delivered some of the trades of the decade (short JPY). But worryingly, the withdrawal of central banks has also delivered some of the largest VaR shocks (taper tantrum, EUR/CHF).”
“With an increasing number of central banks actively involved in rates and FX, the question is more when rather than whether the next vol shock occurs.”
“Denmark & Japan could be post-SNB, though the Swiss case is more a lone, historical example than a template. There is no definitive metric for gauging when financial risk has become inordinate.”
“The endgame on Japan’s QQE or Denmark's FX peg would only be clearer if either country faced an imminent inflation problem this year, but absent that scenario, EUR/DKK and USD/JPY become an exercise in pricing a tail risk over the next couple of years.”
“For now, look to sell EUR/DKK this quarter once EUR/USD is closer to topping.”
“With USD/JPY disregard the 2014 logic that low inflation is yen-negative because it courts the launch of QQE 3.”
Key Quotes
“Central bank balance sheets are very much in focus for currencies, although now perhaps due to concerns about the sustainability of certain policies.”
“Although purists tend to decry central bank participation in markets, it is hard to deny that unprecedented involvement like QE has delivered some of the trades of the decade (short JPY). But worryingly, the withdrawal of central banks has also delivered some of the largest VaR shocks (taper tantrum, EUR/CHF).”
“With an increasing number of central banks actively involved in rates and FX, the question is more when rather than whether the next vol shock occurs.”
“Denmark & Japan could be post-SNB, though the Swiss case is more a lone, historical example than a template. There is no definitive metric for gauging when financial risk has become inordinate.”
“The endgame on Japan’s QQE or Denmark's FX peg would only be clearer if either country faced an imminent inflation problem this year, but absent that scenario, EUR/DKK and USD/JPY become an exercise in pricing a tail risk over the next couple of years.”
“For now, look to sell EUR/DKK this quarter once EUR/USD is closer to topping.”
“With USD/JPY disregard the 2014 logic that low inflation is yen-negative because it courts the launch of QQE 3.”