All you need to know about the energy crisis
The desk believes that Europe's energy crisis, intensified by the ongoing geopolitical tensions and the reduction of Russian gas supplies, could have lingering effects on FX markets, particularly euro-sensitive assets. Per the full note from Nordea Insights, the energy crisis has caused fluctuations in electricity prices due to reduced availability of natural gas from Russia and has shifted Europe’s dependence to LNG imports, reflecting a significant change in supply dynamics. As we approach winter, Europe may have secured enough energy, but high prices are expected to persist, directly impacting economic recovery trajectories in the region.
What the desk is arguing
The desk frames this as a pivotal moment for Western Europe’s energy landscape which is likely to influence currencies across the region, especially the euro. The dependence on Norway and LNG has transformed cost structures within electricity pricing, presenting both challenges and opportunities.
Nordea discusses that Russian gas imports have plummeted from 40% to around 8%, now being replaced primarily by Norwegian supply and LNG, reflecting a total structural shift in the market. Such changes have made the cost of electricity surge, impacting European industrial output and inflation metrics which traders need to closely monitor.
Where it sits in our coverage
The consensus target for EUR/USD among our monitored firms stands at 1.075, with the range indicating a focus between 1.04 and 1.12. Specific allocations include: - JPMorgan: 1.10 (Mar-26) - BofA: 1.04 (Mar-26)
The desk’s view aligns particularly close to JPMorgan's stance, sitting towards the higher end of the consensus range. This implies optimism regarding euro resilience amidst energy challenges, a position that could be tested based on further developments in energy pricing and supply stability.
How other firms see it
Similar assessments are evident among firms such as BNP Paribas and Deutsche Bank, who share a bullish outlook on EUR performance considering the long-term structural adjustments in energy. In contrast, Goldman Sachs leans towards a bearish perspective, citing persistent risks associated with inflation and energy pricing dynamics.
Another currency pair to watch is the EUR/GBP, which could also reflect the sentiment surrounding European recovery as it navigates these energy challenges.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Russia's gas supply to Europe has declined from 40% to 8%, increasing reliance on LNG and Norwegian imports.
- 02High energy prices are inflating electricity costs, affecting overall economic recovery in Europe.
- 03The Nordic electricity system remains a net exporter and plays a significant role in European energy dynamics.
Market implications
Keep an eye on the EUR/USD level around 1.075, where volatility is expected given the current energy prices. The interactions between energy costs and GDP growth metrics are critical indicators to watch in the near future.
Risks to this view
A significant drop in energy prices or an unexpected easing in geopolitical tensions could reverse the current bullish outlook for the euro. Furthermore, if the EU's inflation rates don't stabilize, it could lead to a rapid recalibration in currency valuations.
Nordea On Your Mind All you need to know about the energy crisis 08-12-2022 Europe’s ongoing energy crisis is in focus in the latest Nordea On Your Mind podcast. Johan Trocmé and Viktor Sonebäck , the brains behind Nordea On Your Mind, discuss several aspects of the energy crises in their latest podcast, “Never waste a good energy crisis” . First up in the discussion is the Nordic electricity system and why it is uniquely clean, efficient and cheap.
It turns out all four Nordic countries have lower CO2 emissions than the European average, notes Sonebäck. “Over half (of Nordic electricity) comes from hydro power, only 5% from fossil fuels, and 18% is from nuclear, built out in the 1970s after the OPEC I and OPEC II oil shocks,” he explains. The Nordic electricity system is connected to that of its neighbours, the UK, Netherlands, Germany, Poland, Estonia and Lithuania. Electricity is traded across borders, and the Nordic region is a net exporter to Europe of 9% of its electricity output.
Could the Nordic region take advantage of its strong electricity system and close its borders to electricity trading? No, explains Trocmé in the podcast. EU members have to make at least 70% of their output available to the market.
The EU has a target for 15% interconnection between member countries, recently raised from 10%. Impact from the war in Ukraine Russian gas imports to Europe are dramatically down following Russia’s invasion of Ukraine. The resulting high gas prices are spilling over into higher electricity prices, also in the Nordics.
The impact is big as Russia represented 43% of gas imports and 54% of coal imports to Europe, together representing 16% of Europe’s electricity generation. “Russia used to account for 40% of Europe’s gas imports, but that is now down to 8%. The rest is now roughly 40% Norway, 10% Algeria and 40% LNG (liquefied natural gas),” says Trocmé. Europe is now well prepared for the winter, having replaced lost Russian gas imports with expensive LNG.
Gas storage levels are now at 94%, actually higher than this time last year. But the high energy prices are driving inflation. “The Nordea macro view is that this will be reasonably transitional – an inflation spike which eases in 2024, with a similar development for interest rates. But there are risks,” says Sonebäck.
The OECD describes a risk scenario with a cold winter, which would quickly eat up gas reserves, reducing Europe’s GDP growth by 1.3 percentage points and raising inflation in the region by 1.4 percentage points. We wanted to show you a Spotify but you cannot see it as you have not enabled cookies Click here to update your consent Explore more articles on Nordic energy supply Is there a way out of Europe’s big energy crisis? What will the next steps be for the world-class electricity systems in the Nordics?
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