Headwinds
We now pencil in a rate cut from the Riksbank at the July meeting. In our view, the markets’ probability distribution should favour a scenario where (1) the Riksbank cuts its repo rate from 0.75% to 0.50% and at the same time (2) signals that the first hike will be delayed from Q2 15 to Q3 15. Hence, lower for longer. At the April meeting, we expect the bank to stay on hold but we would not be surprised if it decides to lower/flatten the rate path now; the current easing bias is -4bp for 2014 but could easily be doubled. The market, on the other hand, is pricing in 10bp of rate cuts until the July meeting (3bp for April and then an additional 7bp) and a cumulated 18bp of rate hikes between now and July 2015. We believe this is too aggressive. Repricing in favour of our scenario is likely to weigh further on the SEK.
However, there are always two legs in a currency cross and the relative SEK versus EUR monetary outlook is, in the end, not necessarily bullish for EUR/SEK. While we expect another cut from the Riksbank, we also expect more easing from the ECB. A plain cut of the refi rate to 0.10% is not fully priced and would weigh on the EUR but a scenario where both the Riksbank and the ECB cut policy rates would weigh more on the SEK than the EUR. It would send the spread-implied fair value, currently at around 8.90, at least 10-15bp higher and potentially more in a scenario with ultra-soft Riksbank forward guidance. If the ECB does outright quantitative easing, the EUR should take more damage though.
The Riksbank has until recently stayed on the sidelines in the ‘currency war’, saying that SEK strength is warranted. The Riksbank still forecasts a stronger SEK but board member comments indicate they are less comfortable with ‘too much’ SEK appreciation given the adverse effects on inflation. Also, the ECB has made significant changes in its currency communication and Mario Draghi said in his introductory statement yesterday that the currency will be ‘monitored closely’. In our view, Euroland has more to lose from ‘too strong’ a currency and should ideally win this currency war.
Tailwinds
It should be noted that the krona also faces some tailwinds like the growth outlook and core fundamentals. We remain bullish on the Swedish growth outlook and have even raised our full-year 2014 estimate to 3.0% y/y, calendar adjusted (2.5%). Therefore, we think the recent trend with good (predominantly better than expected) real macro news, which over the past couple of months has tended to pull EUR/SEK lower, will continue. If we are right, it should mitigate some of the Riksbank-related upward pressure on the pair. We also see commercial interests capping the upside/supporting the downside. The fundamental backdrop, which anchors the long-term outlook, suggests that the krona is cheap versus the euro at current levels.
New forecasts
We raise our 3M forecast to 9.05 (8.80), our 6M forecast to 8.95 (8.80) and the 12M forecast to 8.75 (8.60).
To Read the Entire Report Please Click on the pdf File Below