The Carney/Ingves Trade: Sell GBP/SEK

We have, for a long time, argued that the Swedish krona would continue to appreciate based on its strong fundamental backdrop (see for example FX Trends: GBP and JPY to be left behind with worst policy mix, March 22).

We are aware that the Riksbank was much softer than we forecast last week and that Swedish rates have plummeted. However, it is in our view certainly not a done deal that we will see a rate cut and our non-consensus view (unchanged rates for the next 12 months) might actually get some support this week.

Tomorrow at 08:30 CET the Swedish labour market survey will be released and we forecast it will continue to strengthen in seasonally adjusted terms. We estimate the unemployment rate fell to a seasonal 8.0-8.1% in March and believe employment has grown. It should confirm that the labour market has started to improve. On Friday, we are due to get another important number for the Riksbank. We expect household lending to tick up from the current 4.5% y/y rate after the Swedish house market has shown signs of renewed vigour over the past couple of months. The OMX Valueguard Housing Index for Sweden has risen by more than 6% over the past three months.

Today, we also received the news that Deputy Governor Lars E. O. Svensson is leaving the Riksbank due to the lack of support from his colleagues for his very dovish line. Barbro Wickman-Parak (neutral to hawkish) is also due to leave the Riksbank, on 20 May. The general council is now searching for new candidates and we guess there is a relatively high probability that the balance of the board will shift in a more hawkish direction.

To benefit from strong Swedish numbers this week, we would like to position for a move lower in GBP/SEK. On Friday, the battered UK economy got another blow when Fitch downgraded the long-term foreign and local currency Issuer Default Ratings by one notch from AAA (negative outlook) to AA+ (stable outlook). Fitch is the second major rating agency to downgrade the UK (after Moody’s downgrade on 22 February).

The downgrade underlines that Chancellor George Osborne’s idea of ‘fiscal conservatism’ and ‘monetary activism’ is still very valid and, in our view, it is not too late to position for sterling weakness.

We expect tomorrow’s Q1 GDP to show dismal 0.1% q/q growth. Hence, the UK seems to have avoided -- by almost the smallest margin possible -- an embarrassing triple dip recession. However, this is still not very impressive growth. Furthermore, the dip in global commodity prices should come as a pleasant present for the BoE. Everything else being equal, we expect UK inflation to be pushed lower making it easier for the Bank of England to deliver the much needed monetary easing that Chancellor Osborne is calling for so desperately.

In respect of monetary easing note that according to Bloomberg Osborne may extend the Bank of England’s Funding for Lending Scheme as early as this week.

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