In Sweden all focus will be on the monetary policy announcement on Thursday at 09:30 CET. Anything but a rate cut from the Riksbank would be a major surprise, so all focus will be on the accompanying Monetary Policy Update and the new rate path.
Most likely the Riksbank needs to fulfill the following requirements for the market reaction to be neutral to slightly lower rates (stable to weaker SEK): 1) cut rates by 25bp, 2) indicate that a 2nd rate cut has a relatively high probability and 3) postpone the first hike another quarter or two and finally 4) lower the repo rate path for the final few quarters, i.e. 2016 and 2017 by some 50bp.
This is also more or less what we expect. So risk/reward is starting to look neutral. If we should see more reaction on rates and in the FX market, the first rate hike has to be postponed until mid-2016. We still like though to receive SEK 2y2y swap vs EUR.
The Riksbank meeting might present an opportunity to go short the EUR/SEK at an attractive level for a slow move lower in the cross over the next three to six months.
The soft message from Norges Bank two weeks ago continues to be the main theme in the Norwegian market and NOK rates have continued to edge lower and the EUR/NOK to edge higher. However, some of these moves are now starting to look a bit excessive and we look for possible money market trades that will benefit if the market once again moves the timing of the first rate hike closer and/or lowers the probability of a rate cut.
On Tuesday 1 July, the Danish Debt Management Office (DMO) will hold a tap auction of the DGB 4% Nov-2019 and DGB 1.75% Nov-2025. We expect to see strong demand at this week's auction. The current pricing of both bonds is looking attractive after recent underperformance versus both EUR peers and swaps.
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