SEK to outperform on growth, valuation after the Riksbank
Lower commodity prices and CPI to weigh on RBNZ, NZD
Our models and technical indicators all point to a lower NZD/SEK
Strategy
Yesterday the Riksbank cut the repo rate by more than expected (25bp to 0%) and postponed the first rate hike to mid-2016 in line with expectations (see Riksbank goes zero for longer, 28 October 2014). The dovish tone weakened the SEK by roughly 0.7% in trade-weighted terms. In light of Riksbanken’s larger-than-expected move yesterday, we believe that the SEK-downside is limited and we do not believe an announcement of additional measures is imminent (i.e. QE or currency floor). Technically, NZD/SEK seems slightly overbought with a RSI-14D of 61. In addition, our short-term financial models indicate an overvalued NZD/SEK with a fair value estimate of 5.756. Lastly, the Danske Bank PPP-model estimate of 4.55 indicates that NZD/SEK is fundamentally significantly overbought. In addition, it is worth noting that NZD/SEK has a beta to global equities (weekly relative changes since 2000) of 0.07, which means that our view of a lower NZD/SEK is insensitive to changes in global risk sentiment. The latest IMM data show that NZD positioning leaves plenty of downside potential.
Fundamentals
New Zealand Q3 inflation figures dropped to 1.0% y/y (prior 1.6%) – markedly lower than consensus (1.2% y/y), RBNZ’s own forecast and RBNZ’s medium-term 2% inflation target. Consequently, we find it very unlikely that any imminent rate hike is in store. What is more, the New Zealand economy continues to struggle due to the marked fall in commodity prices. In particular milk powder prices have fallen sharply (down 50% since February), which has contributed to returning the trade balance to a deficit (chart 1). With a slowing economic momentum and rate hikes being postponed globally, we expect RBNZ to remain on hold until Q4 15, with the medium-term risk now skewed to the downside. In addition, the latest release of RBNZ FX reserve data has removed speculations that RBNZ will stick to verbal intervention alone. We expect RBNZ to continue its wording in tonight’s statement that the NZD remains at an ‘unjustified and unsustainable’ level and we think the possibility of further intervention is imminent.
Fundamentally, we are bullish on the SEK as growth outperformance and valuation support a stronger SEK. We forecast Swedish growth at 2.2 in 2014 and 2.6% in 2015. We forecast NZD/SEK at 5.59 in 1M and 3M.
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