riksbank

The EUR/SEK pair ended last week largely unchanged, although the krona did briefly slip to its lowest level on the euro since mid-December. Swedish activity data released last week was mixed. On the one hand, retail sales fell by 1.7% YoY in November, compared to a decline of 1% in the previous month, the nineteenth consecutive month of annual declines in retail trade.

On the other hand, the more important GDP data unexpectedly rebounded in November (+0.2% vs. 0.6% consensus), easing fears that the ongoing recession could extend into Q4. The above data imply a significant divergence from the Riksbank's forecast, which warned of an economic decline of 0.4%. This will undoubtedly be a relief for the Riksbank and should make for an easier task in controlling inflation without damaging the economy. If the good data materialises into a more hawkish stance by the central bank, the krona could receive some support.

Observing SEK, Riksbank, Bank Of Japan And EURUSD

Observing SEK, Riksbank, Bank Of Japan And EURUSD

John Hardy John Hardy 11.02.2022 12:14
Forex 2022-02-11 11:25 5 minutes to read Summary:  The latest US CPI data proved far hotter than expected once again, taking Fed rate hike expectations higher still. The US dollar actually shrugged this development off initially before rallying on a significant further boost to potential Fed tightening after a hawkish broadside from FOMC voter Bullard. Elsewhere, the Bank of Japan just doubled down on its yield-curve-control policy and the Riksbank threw the krona under the bus with a dovish meeting. FX Trading Focus: USD firming underwhelms, given massive further shift in Fed expectations, BoJ doubles down on YCC, Riksbank throws SEK under the bus. US dollar snaps back after whiplash-inducing sell-off post-CPI release. The January US CPI release came in hotter than expected, at 0.6% month-on-month for both the headline and ex-food-and-energy measures vs. +0.4%/+0.5% expected, respectively and at +7.5% / +6.0% year-on-year versus +7.3%/+5.9% expected, respectively. Both of the year-on-year numbers were the highest for the cycle and the highest in forty years and took Fed expectations higher still. Somewhat curiously, the USD kneejerk higher on the data release was quickly erased and the greenback actually sold off to new local lows before later rallying on a hawkish broadside from St. Louis Fed President and FOMC voter James Bullard. And even then, the USD strength looks underwhelming, as discussed in the EURUSD chart below. As noted, Bullard was out speaking yesterday in an interview with Bloomberg yesterday and said that he would like to see 100 basis points of Fed tightening “before July 1” which implicitly means that, if the hikes were to take place at regularly scheduled meetings, one of the three meetings between now and then would need to see a 50-basis point move. He would also like to see QT (balance sheet reduction) beginning in the second quarter and even brought up the idea of an emergency move between meetings. “There was a time when the committee would have reacted to something like this to having a meeting right now and doing 25 basis points right now...I think we should be nimble and considering that kind of thing.” The Fed hasn’t done an emergency hike at a non-scheduled regularly meeting since 1994, as far as I can tell. The combination of the CPI and Bullard’s comments took the March FOMC meeting expectation to +46 basis points, i.e., very strong consensus that the Fed will hike fifty basis points (or an emergency move of 25 bps plus another 25 bps at that meeting) and the anticipated rate through the December FOMC meeting is some 30 bps higher at above 178 bps than where it closed Wednesday. Bank of Japan set to enforce its yield-curve-control policy – before the US CPI release yesterday, the Bank of Japan announced that it would buy “unlimited” amounts of 10-year JGB’s in operations on Monday, obviously to enforce its 25 basis point yield cap on 10-year Japanese sovereign debt after the yield on that debt had reached as high as 23 basis points yesterday. The JPY was sharply weaker on the news, but USDJPY avoided new highs above the previous 116.35 mark as it came back broadly bid – especially in the crosses yesterday - on energy prices and risk sentiment cratering.  This is an interesting move from the BoJ if it maintains this policy, as any further rise in global bond yields from here, particularly longer yields, will theoretically have to absorbed by further weakening of the already very weak Japanese yen. Riksbank dovish, SEK rushes lower – the Riksbank failed to make any shift in line with the recent ECB meeting, as it expressed the view that monetary policy needed to stay loose “for inflation to be close to the target in the medium term.” As well, the Riksbank promised to continue with enough QE to keep the bank’s balance sheet unchanged through this calendar year before allowing holdings to “decrease gradually.” The rate lift-off time frame was only pulled forward to the second half of 2024 from the prior forecast of Q4 of 2024. All in all, a very dovish mix despite Governor Ingves providing the decisive vote in overruling dissenting voices on the QE decision, so the Riksbank did an effective job of throwing the SEK under the bus. Chart: EURUSDYesterday’s developments were perhaps both confusing and revealing. Initially, the hot US January CPI release failed to boost the US dollar, which actually dropped to a new low in places (new high in EURUSD) despite additional Fed tightening being priced into the forward curve in the wake of the release. Later, the USD came roaring back only after Bullard unleashed his hawkish broadside that unsettled the market, which is now forced to price in the risk of even an emergency Fed hike before the regularly scheduled March meeting. All in all, the revealing bit is that we wake up this morning with the Fed priced to hike a full 6-7 times through the December meeting this year, with risk sentiment on the defensive and the EURUSD is only about 30-40 pips below the Wednesday close. This suggests that the path to a stronger US dollar is a very difficult one (a full-on market crash?) and increases the conviction in the downside potential. The ultimate test for that notion would be if the Fed does indeed deliver an emergency hike in coming days and yet EURUSD fails to fall much further or even shows resilience and bounces back to current levels or higher.Source: Saxo Group Table: FX Board of G10 and CNH trend evolution and strength.Yesterday’s action didn’t do much to alter recent trends, though note the Swedish krona biting hard to the downside…Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Watching how USD pairs shaped up in the wake of the churning back and forth yesterday, and as we watch the nature of the consolidation after the huge EURUSD rally off the lows.Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1030 – Russia Central Bank Key Rate Announcement (expected to hike 100 bps to 9.50%) 1500 – US Feb. Preliminary University of Michigan Sentiment  
Are There More Rate Hikes On Swedish Krona's (SEK) Way?

How Much Will Swedish Krone (SEK) Gain!? Bank Of Sweden Surprised With The Reference Rate Hike

Conotoxia Comments Conotoxia Comments 28.04.2022 16:27
Today, the Bank of Sweden unexpectedly raised the reference rate from 0 to 0.25%. The market did not expect any changes at this point, which may have surprised some investors. As a result, the Swedish krona (SEK) gained about 1 percent against the euro. The central bank's board also decided to immediately stop buying T-bills and reduce the pace of asset purchases in the second half of the year Sveriges Riksbank also signaled the possibility of further increases this year. The central bank's board also decided to immediately stop buying T-bills and reduce the pace of asset purchases in the second half of the year. These decisions could mark a sharp turnaround from the bank's guidance from the previous meeting. It would be aimed at countering soaring inflation and preventing higher prices from becoming entrenched in the economy. The bank's board cited on increased uncertainty in the global economy in the wake of Russia's assault on Ukraine and the return of tight covid restrictions in China. Annual inflation in Sweden rose to 6 percent in March, above expectations and the highest in more than three decades. With monetary policy tightening, the Riksbank expects inflation to fall in 2023 and approach 2 percent in 2024. The EUR/SEK exchange rate thus fell from 10.37 to 10.25 The market's reaction seems to be rather abrupt, as in the first moment after the Riksbank's decision the Swedish krona strengthened by around 1 percent against the euro. The EUR/SEK exchange rate thus fell from 10.37 to 10.25. In turn, the USD/SEK exchange rate fell from 9.85 to 9.70. Earlier, the Swedish krona was losing ground to the US dollar. As recently as January, the USD cost SEK 8.20, and in March the SEK 10.00 level was crossed. The impact on the Swedish krona may be significant, hence the USD/SEK or EUR/SEK pairs may draw the attention of some investors The Bank of Sweden therefore appears to be joining the ranks of hawkish global central banks, and its determination to act may be strong. As a result, the impact on the Swedish krona may be significant, hence the USD/SEK or EUR/SEK pairs may draw the attention of some investors. Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service) Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Are There More Rate Hikes On Swedish Krona's (SEK) Way?

Hold On Tight Swedish Krona (SEK)! Let's Check Out Swedish Riksbank Decision On Rates!

ING Economics ING Economics 20.09.2022 14:20
Sweden’s central bank hiked the repo rate by 100bp to 1.75% today and signalled more tightening is on the way. The krona’s reaction was negative though, as monetary policy keeps proving a secondary FX driver and the Riksbank’s reserve build-up remains under scrutiny amid a generalised bad environment for high-beta European currencies 100bp hike and an updated rate profile Sweden’s Riksbank has hiked rates by 100bp taking the repo rate to 1.75% – the biggest hike ever since the initial introduction of inflation targets. The decision to hike by 1% was unanimous, prompted by the highest level of CPIF inflation since 1991 and the negative implication it could have on the upcoming wage negotiation which will lock in pay growth for the next three years. Looking at officials’ new interest rate projections, they are signalling a further 25bp hike at the November meeting and that rates will be around 2.50% in mid-2023. It looks like, as of now, with uncertainties regarding inflation remaining high throughout the winter, the bank accepts the housing market slowdown in the medium-short term, prioritising bringing down long-term inflation risk instead.   Source: Riksbank, ING Our forecasts for Riksbank and the krona We think the Riksbank may deliver more front-loading (so a 50bp hike) in November compared to what is embedded in the rate path projections (25bp). Indeed, Governor Stefan Ingves stressed that policy decisions will be taken on a meeting-by-meeting basis, hence reducing the relevance of rate projections. It’s clear that further rate decisions will heavily rely on the energy story and the European economic outlook. As discussed in our most recent SEK update, a more hawkish Riksbank would hardly translate into a stronger krona in the near term, both because the relation between short-term rates and FX has waned across G10, and because the energy crisis in Europe should keep high-beta European currencies like SEK vulnerable. Today’s reaction in EUR/SEK was a case in point: an initial drop after the larger-than-expected hike was quickly followed by strong buying and the pair jumping above pre-meeting levels. Another factor that has likely contributed to the bad SEK reaction was the reiteration by Ingves that the Riksbank will continue to build FX reserves (i.e. selling SEK mostly against USD and EUR) at the same pace. This has been seen by markets as a bearish factor for SEK lately, and we cannot exclude that the larger hike was meant to partly offset this factor.   We continue to see upside risks to EUR/SEK in the near term, especially if the 10.86 March high is broken – basically leaving the 2020 (11.00+) market crash highs as the next key resistances for the pair. We remain cautiously optimistic about a SEK recovery in early 2023, along with other pro-cyclical currencies, and see room for a return below 10.50 in EUR/SEK. The timing and the likeliness of this SEK recovery are however highly uncertain and largely depend on the energy crisis and general risk sentiment. Read this article on THINK TagsSEK Riksbank Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Tight Monetary Policy Is Already Weighing On The Swedish Housing Market

Tight Monetary Policy Is Already Weighing On The Swedish Housing Market

ING Economics ING Economics 23.01.2023 08:39
We outline four different paths for EUR/SEK in 2023 based on developments in four key areas: global risk sentiment, Europe’s economic performance/energy prices, Riksbank-ECB policy divergence and Sweden's domestic economy. Our baseline scenario is moderately bearish for EUR/SEK, and expect to see sub-10.50 levels by 3Q23 before a 4Q rebound   We recently revised our EUR/USD forecast higher on the back of a radically changed global macroeconomic picture. Slowing inflation and a deteriorating data-flow in the US have forced a dovish repricing in Fed rate expectations, while the European Central Bank looks determined to keep hiking at a sustained pace. Meanwhile, a positive re-rating of growth expectations occurred in both China (thanks to the easing of Covid rules) and Europe (thanks to lower energy prices). All this points – in our view – to dollar weakness and a more benign environment for high-beta currencies in 2023. In this article, we outline four potential patterns for EUR/SEK based on four key factors set to drive the pair over the short and medium term: global risk sentiment, Europe’s economic performance/energy crisis, Riksbank-ECB policy and Sweden’s economy. The range of outcomes is derived from the expected volatility priced in by the options market. Four scenarios for EUR/SEK Source: ING, Refinitiv External environment The first two factors in our scenario analysis are purely external to Sweden. Global risk sentiment remains – statistically – the single most important driver of EUR/SEK in the medium term. The Fed’s policy is a key driver in this sense. Our economics team has recently highlighted how the deterioration in forward-looking data (like the ISM Services), combined with the easing in inflationary pressures, are shedding doubts on whether the Fed will be able to deliver another 50bp of total tightening and take rates to 5.00%. We now expect a larger easing package (100bp) in the second half of 2023 compared to what markets are pricing in (60bp). While lower rates should be a straightforward positive factor for global equities and high-beta currencies such as SEK, there is a key caveat. Should the easing cycle be triggered primarily by a pronounced US economic underperformance rather than primarily by falling inflation, the net positives for high-beta currencies would be offset. SEK should benefit from the improvement in the eurozone's growth picture SEK presents one of the strongest sensitivity in G10 to eurozone’s growth sentiment, which at this historical juncture is very strictly a function of energy prices and geopolitical developments in Ukraine. ING’s views on the eurozone’s economy can be found in our economics team's “Eurozone Quarterly”: one key point is that the abatement in gas prices (largely thanks to mild weather) has allowed a recovery in the euro area's economic outlook, and a recession can now be averted. The improvement in the eurozone’s outlook should have – in theory – weighed on EUR/SEK, since SEK tends to have a higher beta than the euro to the eurozone’s growth. However, this has not been the case lately. There are two reasons for this: first, the hawkish surprise by the ECB triggered EUR-specific strength; second, risk sentiment was rather weak into year-end and only margianlly recovered at the start of 2023. We discuss in the next paragraph the relevance of ECB and Riksbank policy for EUR/SEK, but an important takeaway is that SEK has some room to catch up with the improved eurozone growth picture, although that can only occur in a stable or recovering risk environment. Sensitivity to rate differential rising The sensitivity of EUR/SEK to the EUR-SEK two-year swap rate differential (which tracks the ECB-Riksbank policy divergence) has started to pick up again recently. This happened largely thanks to: a) gas prices abating and no longer being the key driver of short-term moves in European currencies; and b) the ECB turning increasingly aggressive on tightening. For most of last year, the correlation between EUR/SEK and its short-term swap differential was rather muted – as shown below. The large hikes by the Riksbank were not translating into a stronger krona: the 100bp hike in September was a case in point. This was observed across many developed central banks. We think that a generalised improvement in the global risk picture can keep rebuilding the FX-rate differentials relationship in 2023, including for EUR/SEK. Accordingly, the ECB-Riksbank policy divergence should regain relevance for the pair. EUR/SEK and short-term swap rate differential Source: ING, Refinitiv ECB and Riksbank policy We expect the ECB to hike by 125bp by mid-2023, in line with the Governing Council’s recent rhetoric and the improved economic outlook in the eurozone. That would take the deposit rate to 3.25%, which is currently what markets are pricing in. Unlike the Fed, we expect rate cuts will only be a 2024-2025 story in the eurozone. We expect 75bp of hikes by the Riksbank, but 100bp are also on the table The Riksbank’s policy rate is currently at 2.50% and our baseline scenario sees 75bp of additional hikes in Sweden and a peak rate of 3.25% like the ECB deposit rate. This is in line with market expectations. We see, however, an elevated risk of 100bp being delivered. The reasoning behind this is that: a) inflation is still very elevated in Sweden (CPIF 10.2% year-on-year, core CPIF 8.4% YoY) and proved rather sticky in latest reads; b) there is a rather explicit interest by the Riksbank to support the krona (which would help fight inflation). On this second point, the most straightforward approach to support SEK is not to underdeliver compared to market expectations on monetary tightening, especially at a time when the ECB is hiking aggressively. In our baseline scenario, we see the EUR-SEK short-term rate differential being capped as ECB tightening is fully priced in and the Riksbank can still moderately surprise markets on the hawkish side. The Riksbank explictly wants a stronger krona The timing of rate cuts is another important point, especially for the EUR/SEK outlook in 2H23. In our view, for the same reasons mentioned above – and especially the Riksbank’s preference for a stronger SEK – the discussions about monetary easing will be delayed as much as possible. We currently pencil in the first rate cut by the Riksbank in 2024, and we expect it to come a few months before a similar move by the ECB. Another approach to support the krona could go through FX reserves. The Riksbank accelerated the build-up of its FX reserves in early 2022, which essentially implied selling SEK to purchase foreign currencies (mainly USD and EUR). This seemed counterintuitive given the desire for a strong currency, but the Riksbank highlighted how reserve management was not part of the monetary policy framework. Pace of FX purchases slowing Source: ING, Riksbank   FX reserve data shows that the pace of purchases has abated recently, and that reserves are now above the 2019 recent peak. This is already good news for SEK, but it does not look hihgly likely – for the moment – that the Riksbank will start actively selling FX to support the krona. It could become a more viable option later this year should SEK feel more depreciating pressure despite a hawkish monetary policy or should the bank be forced to halt hiking earlier than expected. Some uncertainty around the Riksbank’s policy is also tied to the recent change of governor. Erik Thedéen took the role at the start of the year, but we do not have enough information about his stance on monetary policy to conclude he will bring any substantial changes in the bank. Riksbank facing a housing dilemma There is one key downside risk to our 'hawkish' scenario for the Riksbank. Unlike the ECB, the Riksbank has to deal with a very vulnerable property market. Indeed, tight monetary policy is already weighing on the Swedish housing market. Rising costs for debt servicing and construction had drastically reduced consumer and investors’ appetite, resulting in prices falling substantially. The headline Valueguard HOX index shows a peak-to-trough fall of 15.2%, and the Riksbank forecasts a further decline until the third quarter of 2023.   Swedish housing market under pressure Source: ING, Riksbank, Valueguard   Looking at the Swedish mortgage market, only 10% of new loans have a fixation period of longer than five years, and over half of the total loans are on variable. Together with the Swedish household debt proportion to net disposable income rising steadily over the past two decades to 200 percent, there are some limits to how far the Riksbank can go with tightening before triggering a fully-fledged property crash. Mortgage markets breakdown by interest rate type, new loans (%) Source: ING, European Mortgage Federation   A black-swan scenario for SEK could materialise if ultra-sticky inflation forces the Fed, the ECB and the Riksbank to push rates considerably higher than what markets are currently expecting, triggering a crash in the housing market. That could also lead to big rate cuts in late 2023 to support the economy. In our baseline scenario, the 75-100bp of tightening by the Riksbank should keep fuelling the property market correction, but in a controlled manner and not excessively exceeding the Riksbank’s estimates. Our forecast for EUR/SEK After discussing the range of possible patterns for EUR/SEK in 2023, it’s time to sum up our view, which corresponds to the "Cautious optimism" scenario above. We are moderately bearish on EUR/SEK in 2023 given the projected improvement in the eurozone’s economic outlook and in risk sentiment. More in details, we expect EUR/SEK to trend lower and move sustainably below 11.00 by the end of the first quarter as the Riksbank hikes by 50bp and signals more tightening, while European sentiment improves. Then, we expect EUR/SEK to test the 10.00/10.50 trading range in the third quarter, when Fed rate cuts could give high-beta currencies like SEK an advantage over the EUR, and the beneficial effects for the krona of an improved European economic outlook emerge. However, SEK could experience some weakness towards the end of the year – i.e. EUR/SEK moving back above 10.50 – as colder weather could bring higher energy prices and a deterioration in risk sentiment. It's important to note that this profile embeds our view for a rather strong EUR in 2023. We expect to see larger SEK gains against the dollar. ING forecasts Source: ING Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Riksbank set for 50bp rate hike on weak krona and tight jobs market

Riksbank set for 50bp rate hike on weak krona and tight jobs market

ING Economics ING Economics 07.02.2023 11:58
Further weakness in the Swedish krona and the prospect of higher wage growth point to a larger rate hike than the Riksbank had signalled in November. From an FX perspective, a hawkish 50bp move seems necessary to avert another leg lower in SEK. Expect a further 25bp hike to follow in April Source: Shutterstock Riksbank set for a 50bp rate hike The Riksbank signalled back in November that it was very close to the top of its tightening cycle, and its published interest rate projection pointed to one final 25bp hike this month. But since then, the European Central Bank has become yet more hawkish even as the Federal Reserve indicates it’s nearing the peak. On a trade-weighted basis, the krona is even weaker than during the financial crisis. According to the Riksbank’s in-house KIX exchange rate index, SEK is almost 5% weaker than it had projected back in November. Riksbank interest rate projections at recent meetings Source: Riksbank Wage negotiations and a tight jobs market point to another hike in April The jobs market is also historically tight. Wage negotiations are underway, and inflation expectations among both employer and employee organisations are off their highs but remain well above the levels we’ve seen over the past decade. Around 90% of Swedish employees have their wages set by collective-bargaining, among the highest rate in Europe, and these talks will set the tone for pay growth across the economy. All of that suggests the Riksbank will hike by 50bp this week, and signal there’s more to come. But this is where life gets complicated for new Governor Erik Thedéen. The reality is that Sweden’s economy is under pressure, particularly when it comes to housing. 44% of Swedish households have a mortgaged property, and two-thirds of this lending is on floating rates. Unsurprisingly, house prices are so far down 15% from the peak. The latest activity data doesn’t look pretty either, with fourth quarter GDP coming in sharply negative. Against the backdrop of this growth/inflation trade-off, we think the Riksbank will signal one further hike in April worth 25bp. That’s likely to mark the top of this cycle.   Inflation expectations among employee/employer organisations are high Source: Macrobond (Prospera survey) Counting on the Riksbank to halt the SEK slump It’s hard to see a sharp recovery in the very near term for the krona. Markets are increasingly pricing in the risk that the Swedish economy will face a black swan scenario of high inflation, recession and housing crash: EUR/SEK is trading around 2.5% below its short-term fair value, according to our calculations.  Read next: United Airlines May Be Fined For Allegedly Missing Safety Checks| FXMAG.COM There is no quick fix to restore confidence in the krona, and data will play a big role along the way, but for now, a hawkish 50bp hike by the Riksbank is a necessary move to try and halt the SEK slump.   A dovish surprise would risk sending the wrong signal to markets: that fighting inflation is no longer the primary goal. That may ultimately cause more pain through imported inflation as SEK accelerates its fall and the ripple effect to the mortgage market may be even worse than a 50bp hike. Staying hawkish and preventing a fall in SEK rates appears to be the only way forward for the Riksbank at the moment. EUR/SEK is trading around 11.40 at the time of writing, still relatively close to the 11.68 record highs from March 2009. Averting a SEK slump to those record levels is job number one for the Riksbank right now, and we think a hawkish 50bp hike today can reduce pressure on the krona.   Our longer-term view is that EUR/SEK can return below 11.00 by this summer, but it’s a narrow path with plenty of risks. It’s simply undeniable that the outlook for SEK has become much more binary: with many negatives in the price, an improvement in Sweden’s economic outlook can boost SEK; a black swan scenario could instead push EUR/SEK well above 12.00 (as discussed in our 2023 scenario analysis). Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
FX Daily: Riksbank needs to stay hawkish today

FX Daily: Riksbank needs to stay hawkish today

ING Economics ING Economics 09.02.2023 08:56
The Riksbank should hike by 50bp today, in line with expectations. We think it is necessary to sound hawkish to help restore confidence in the krona, despite a deteriorating economic and property market backdrop. Meanwhile, high-beta FX is on the rise this morning, but the rally may be premature given the scope for more hawkish Fed rate repricing Stefan Ingves is the Governor of the Swedish Central Bank USD: May be too early to jump back on short-dollar bets After only moderately hawkish remarks by Federal Reserve Chair Jerome Powell on Tuesday, other Fed officials delivered more aggressive comments on the prospects for tightening yesterday. Christopher Waller, Lisa Cook, John Williams and Neel Kashkari all pointed at either the need for rates to go beyond 5.0% or reiterated the higher-for-longer narrative. All this prevented a recovery in risk sentiment yesterday and helped the dollar build a temporary floor. This morning, European and US equity futures point to a positive open, and high-beta currencies are in demand. This might be a sign that markets are seeing this moment as the peak in the Fed’s hawkish communication and are now eyeing opportunities to re-enter short-USD pro-cyclical positions at more attractive levels.   However, there is still some room for USD rates to absorb further hawkish repricing in rates expectations, and the rebound in risk currencies may be premature. Markets are pricing in a 5.13% Fed peak rate as of this morning, so still not fully factoring in another hike beyond March. Around 50bp of easing in the second half of the year remains in the price, which reflects both disinflation and recession risks in the US. Probably, the aim of hawkish Fed speakers at this stage is to convince markets that a) rates can go at least to 5.25%; b) that rate cut speculation is misplaced. It is fair to expect that more evidence from data will be required to convince markets of another 25bp after March. Jobless claims are the highlight of the day in the US today, and tomorrow’s University of Michigan sentiment index is the last piece of data in the US for the week. We think that a more patient trading environment could return after this morning’s risk-on mood and last until Tuesday’s pivotal US inflation report. In FX, it appears too early for the dollar to re-enter a sustained downtrend: local stories may instead take centre stage.   Francesco Pesole EUR: German inflation tests ECB hawkish comments German inflation numbers released this morning surprised on the downside. Headline CPI grew 8.7% year-on-year, lower than the forecasted 8.9%. The EU-harmonised print showed a deceleration from 9.6% to 9.2%, while consensus expectations were for a return to double-digit inflation. This will probably test the ability of the European Central Bank to continue pushing back against the bullish reaction in the rates market after last week’s ECB meeting. We’ll hear from Governing Council members Francois Villeroy, Joachim Nagel, Pablo Hernández De Cos and Luis de Guindos today. EUR/USD may struggle to climb back to the 1.0800 handle just yet. Elsewhere in Europe, keep an eye on Bank of England Governor Andrew Bailey as he testifies before parliament. Like in the eurozone, we have seen a good deal of hawkish commentary in the UK following last week’s BoE rate decision, and markets likely expect any policy comments today to fall on the hawkish side of the spectrum too. Weakness in the euro is endorsing the recent drop in EUR/GBP, and 0.8800 might be tested in the near term. Still, we don’t see the pair’s depreciation as sustainable given the grim economic outlook for the UK and no clear policy divergence.   Francesco Pesole SEK: A big day for the Riksbank The Riksbank and its new Governor Erik Thedeen are facing a historic challenge. The Swedish economic outlook looks very bleak, with both GDP and high-frequency data pointing down and the housing market having already corrected 15%. On top of that, inflation remains above 10% and the krona is close to all-time lows against both the euro and in trade-weighted terms. Today’s rate announcement and monetary policy report is of huge importance for the krona. We expect, in line with consensus, a 50bp rate hike today (here is our full preview). This outcome is fully priced in, but more uncertainty lies around the forward-looking tone and rate projections. We think the Riksbank has all the interest in sounding hawkish at this stage, despite acknowledging the risks related to the housing slump and high inflation. Rate projections from November see a peak below 3%: we think today’s revision will take it to at least the 3.25-3.50% region. With wage negotiations in Sweden about to end and a tendency for Swedish data (especially CPI) to be rather volatile, patience should be the name of the game for the Riksbank now. Even in the face of a clearly worsening economic outlook, the Bank should focus on a) halting the slump in the krona; b) keeping inflation expectations in check. To us, this appears a necessary step to restore confidence in Swedish markets. Then, data will undoubtedly need to come to the rescue, but with no policy meetings until the end of April, there is definitely some time for the economic and inflation picture to improve. We think a hawkish 50bp hike by the Riksbank can prevent another leg higher in EUR/SEK: a primary goal is to create a cushion for the pair to the all-time March-2009 11.68 highs. With markets currently attaching around 2.5-3% of risk premium to EUR/SEK due to concerns about the Swedish economy, SEK is not lacking room for recovery (our base case is still for a drop below 11.00 in EUR/SEK by the summer). We doubt this will happen in the near term though, and despite a convincing hawkish message by the Riksbank today, restoring confidence in the krona will require help from data. EUR/SEK may trade around 11.20-11.40 in the coming weeks, and that should already be a welcome development for the Riksbank. Francesco Pesole CEE: NBR's turn to confirm end of hiking cycle After the National Bank of Poland (NBP), today it is the turn of the National Bank of Romania (NBR) to confirm what we believe is the end of the hiking cycle. We don’t expect any change in the key rate level, but a mildly cautious tone could be employed to balance the obvious easing of monetary conditions since the last meeting. On FX side, the record demand for ROMGBs is having a positive impact on the Romanian leu, which has been below the NBR's intervention level most of the time since the beginning of the year. Massive inflows into bonds have helped the RON to test levels below 4.90 EUR/RON several times. Plus, global conditions, led by falling gas prices and a higher EUR/USD, are positive for FX. On the local side, the FX implied yield remains attractive as well, fluctuating steadily in the 6.60-7.00% range for the 3M tenor, comparable to the Czech koruna and Polish zloty. However, given the NBR's solid track record of managing the RON, potential FX depreciation losses look limited, which gives a distinct advantage, especially against the Hungarian forint and Polish zloty. Thus, we continue to expect the RON to hold below the 4.90 EUR/RON level depending on further inflows into ROMGBs. As expected, the NBP left rates unchanged yesterday and the statement did not bring much new information. So the main focus will be on Governor Adam Glapinski's press conference today at 3pm local time. The main questions will be on what inflation numbers the NBP expect for January and February, when inflation is expected to peak, and whether the governor still believes in the possible year-end rate cut he mentioned last time. The Polish zloty stabilised yesterday, but market rates have been volatile in Poland this week, probably also due to the NBP meeting, and the zloty remains fragile. The governor's words are thus likely to determine the zloty's direction. On the one hand, we see market expectations still significantly more dovish than our forecast, on the other, the whole IRS curve is higher by about 20-30bp over the last month. Thus, we expect the zloty to maintain the current 4.73-4.75 EUR/PLN range. Frantisek Taborsky Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Sweden: How the Riksbank has made the krona’s path to recovery even narrower

Unusual Scale Of The Swedish Krona Weakness, Crude Oil Trades Higher

Saxo Bank Saxo Bank 09.02.2023 09:56
Summary:  Choppy markets yesterday as the US market erased the prior day’s sharp rally in the ongoing struggle between bulls and bears after the S&P 500 recently cleared important resistance but has stalled out. Treasury yields also dipped after a very strong US 10-year treasury auction as the US yield curve is near its most severe inversion for the cycle. Elsewhere, oil prices have jumped sharply off recent lows over the last three days. What is our trading focus? US equities (US500.I and USNAS100.I): tight trading range Yesterday’s trading session did not confirm the cyclical growth bets in equities with S&P 500 futures erasing the prior gains on Powell’s tight labour market comments and the need for higher policy rates. It feels like the market is transitioning into a tighter range before getting new information on which to decide whether to continue to uptrend or reverse lower. The signs are leaning towards a cyclical uptrend, but the signal-to-noise level remains low across many macro indicators. Yesterday’s open price in S&P 500 futures at 4,167 is the key level to watch on the upside. Chinese equities: Hang Seng (HIG3) and CSI300 (03188:xhkg) lacked of direction Hang Seng Index and CSI300 bounced over 1% after a week-long consolidation. Xiaomi (01810:xhkg), surging 9.5%, was the biggest winner within the Hang Seng Index. Lei Jun, Chairman and founder of the mobile phone and electronic device maker, announced on Twitter in the form of Q & A with a Chatbot that the company is launching its Xiaomi 13 Series mobile phone on 26 Feb. Mobile phone hardware suppliers Sunny Optical (02382:xhkg) and AAC (02018:xhkg) surged 5.3% and 4.1% respectively. The technology space outperformed overall, with the Hang Seng Tech Index climbing 2.5%. In A-shares, food and beverage, communication, defense, and internet-of-things stocks led the advance. FX: Aussie gains stall; sterling outperforms After a strong run higher post-RBA, AUDUSD turned lower yesterday after taking a stab at 0.7000, but was choppy overnight in the Asian session, perhaps buoyed into early European hours by a bounce in metals prices. The key levels for that pair to the downside are the recent 0.6856 low and the 200-day moving average another 50 pips lower currently. USDCAD also returned back above 1.3400 despite the surge in oil prices, with the line of resistance for that pair near 1.3475. Sterling bounced off 1.2000 support in GBPUSD and managed a poke through 1.2100 but has found resistance in that area. The 38.2% Fibo retracement at 1.2120. UK GDP for Q4 will be released tomorrow. The EURGBP rally, meanwhile, has partially deflated after the pair broke well above the key 0.8900 area, trading near 0.8875 this morning and threatening a full reversal if it closes much lower in coming sessions. Crude oil (CLH3 & LCOJ3) prices rise on demand outlook Crude oil trades higher for a fourth day as last week’s long-liquidation-driven sell-off continues to be reversed as the dollar softens and on renewed optimism about the demand outlook for oil, especially in China and other parts of the world that may narrowly avoid a recession. The EIA reported US crude stocks building 2.4mln bbls in the latest week, contrasting the private data that indicated a draw of a similar magnitude. On the demand side, TotalEnergies sees oil demand will rise to a record this year, in line with the IEA’s messaging. Brent is currently trading above its 21-day moving average, currently at $84.95 - in WTI at $78.25 - with a close above likely to provide additional positive momentum. Gold (XAUUSD) trades steady but risk of further weakness lingers Gold remains supported around the $1860 level but so far the failure to break decisively higher to challenge support-turned-resistance in the $1900 area is raising concerns that a correction floor has yet to be found. The yellow metal erased earlier gains on Wednesday after Fed members reaffirmed the view that interest rates will need to keep rising to contain inflation. Since hitting a $1861 low last Friday, gold has been trading within an 18-dollar rising channel, currently between $1870 and $1888, and a break to the downside carry the risk of an extension towards $1828, the 38.2% retracement of the run up from early November. Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) pulled back on a strong 10-year auction The reaction in the Treasury market was muted to the chorus of hawkish comments calling for higher for longer from Fed’s Williams, Waller, Kashkari, and Cook.  The action came in after a strong 10-year auction which awarded the notes 3bps richer than the market level at the time of auction and a strong bid-to-offer-cover at 2.66 times, increasing from 2.53 times in the previous auction. Yields on the 10-year fell 6bps to finish Friday at 3.61%. What is going on? Credit Suisse sees weak 2023 on significant outflows The Swiss bank reports this morning Q4 net income loss of CHF 1.4bn vs est. loss of CHF 1.1bn, but even worse the bank is expecting a substantial loss before taxes in 2023, but also expect to bounce back to profitability in 2024. Outflows in Q4 totalled CHF 111bn but deposits looked positive in January according to Credit Suisse. Walt Disney announces job cuts and $5.5bn cost-cutting plan The Walt Disney Company reported quarterly earnings after hours yesterday, with profits of 99 cents per share well north of consensus estimates of 74 cents and revenue growing 7.8% y/y to $23.5bn, also above estimates. Disney+ streaming service subscribers fell 1% in the quarter, mostly due to their Indian streaming service loosing streaming rights to cricket games. CEO Bob Iger announced a $5.5bn cost saving plan that will include a $3bn reduction in movie-production budgets and the axing of 7,000 jobs. Shares were up over 5% in late trading last night, near $117.80 per share. Uber shares gained 5% yesterday after reporting earnings. The rise in Uber accelerated yesterday, posting a new 10-month high after Uber reporting stronger than expected quarterly results. Uber expects its first ever year of profits, including for its ride and Uber Eats businesses. Uber reported its highest ever number of trips for the quarter at more than 2 billion and nearly 1mn trips per hour. Meanwhile Uber is also receiving more advertising dollars, and on track to achieve its $1bn ad revenue in 2024. A fourth activist investor joins the move to shake up Salesforce Three activist investors, Elliott Investment Management, Starboard Value LP, and ValueAct Capital Partners, have already put pressure on Salesforce’s management to cut costs and improve profitability. Wall Street Journal writes that a new activist investor Third Point LLC has now also taken a stake in the software maker. This group of investors will put enormous pressure on the software maker to improve results over the coming year. UK House Prices continue to drop sharply, according to RICS Survey. The UK RICS Price Balance survey registered a new low for the cycle at –47%, suggesting that nearly 50% more of surveyed estate agents are seeing falling prices than rising prices, the lowest number since 2009, during the financial crisis. This was slightly worse than expected and a drop from –42%, although estate expectations are improving with only 20% believing in a worsening outlook for the next 12 months versus 42% a month ago. European gas settles at 17-month low on mild weather outlook. The Dutch TTF gas futures, Europe’s natural gas benchmark, settled at €53.69 on Wednesday, its lowest close since September 2021, and around 25 euros above the five-year average for this time of year. A cold spell across Europe this past week have had no major impact on prices with ample supplies to meet demand, and forecasters are now looking for milder than expected weather for the rest of the month than previously expected. EU gas in storage remains 69% full and we may enter the injection season in late March near 60% and unprecedented high level, even compared with the recession hit 2020 when the level was 54%. Fed speakers call for higher rates A slew of Fed speakers were on the wires yesterday. While a broad chorus on higher rates was maintained, much of which has been the Fed’s message throughout, markets perceived the messages as hawkish primarily as the January jobs report is still keeping investors concerned. Importantly, all the four speakers last night are voting this year. Christopher Waller said rates may have to stay higher for longer. John Williams called the December dot plot a good guide, adding that rates are "barely into restrictive" territory. He also hinted at a slightly higher terminal rate of 5.0-5.5%. Lisa Cook said "we are not done yet." Neel Kashkari expects the peak to rise above 5% this year as services side of the economy is still hot. Market pricing of the Fed path still pretty much unchanged, with terminal rate priced in at just over 5.1%.  Read next: The GBP/USD Pair Climbed To Around 1.2100, The EUR/USD Pair Is Above 1.0700| FXMAG.COM What are we watching next? Sweden’s Riksbank to hike today – watching guidance after krona’s woeful weakness. EURSEK recently touched its highest level since the global financial crisis back in 2009, a rather unusual scale of SEK weakness, given strong global risk sentiment and an improved outlook for Europe. The new Riksbank governor Erik Thedeen warned on the concerns that rate rises and high inflation (which hit over 12% YoY a the headline and 10.2% for core inflation in December) are risks for Sweden’s financial system, suggesting that the central bank may be reluctant to continue hiking much more beyond today’s 50 basis point rate rise, which would take the policy rate to 3.00%. With 10-year Swedish government bonds trading with a yield south of 2.00%, the Swedish yield curve is even more steeply inverted than Germany’s, suggesting strong concerns for economic growth. RBA inflation forecasts due tomorrow as Chinese students set to return to AU The AUDUSD has had a volatile week, sentiment was lifted a bit overnight in Australia as the iron ore (SCOA) and copper prices moved up over 1% each. China recently docked its first Australian coal import shipment in two years. In what can only prove a boost to the Australian economy, almost 50,000 Chinese students are expected to arrive in Australia this month- ahead of the start of semester. This is due to Beijing’s government ruling that degrees earned online will no longer be recognized. Tomorrow, the RBA will issue its quarterly economic forecasts and policy outlook in Australia on Friday. Earnings to watch Today’s US earnings focus is PepsiCo and PayPal with analysts expecting PepsiCo to report revenue growth of 7% y/y and EPS of $1.64 up 7% y/y as the beverage and snacks business is resilient during inflation. PayPal earnings will an interesting to watch as Adyen in Europe yesterday spooked markets with a significant decline in the EBITDA margin on more hiring and investments in infrastructure. Analysts expect PayPal to report revenue growth of 7% y/y and EPS of $1.20 up 41% y/y. Thursday: KBC Group, Brookfield, Thomson Reuters, L’Oreal, Vinci, Credit Agricole, Siemens, Toyota Motor, NTT, Honda Motor, AstraZeneca, Unilever, British American Tobacco, ArcelorMittal, DNB Bank, Volvo Car, Zurich Insurance Group, Credit Suisse, AbbVie, PepsiCo, Philip Morris, PayPal, Cloudflare Friday: Enbridge, Constellation Software Economic calendar highlights for today (times GMT) 0830 – Sweden Riksbank Policy Rate 0945 – Bank of England Governor Andrew Bailey to testify 1330 – US Weekly Initial Jobless Claims 1400 – Poland National Bank Governor Glapinski press conference 1530 – US Weekly Natural Gas Storage Change 1900 – Mexico Rate Announcement 0030 – Australia RBA Monetary Policy Statement 0130 – China Jan. CPI/PPI   Source: Financial Markets Today: Quick Take – February 9, 2023 | Saxo Group (home.saxo)
Riksbank hikes by 50bp amid concerns about weak krona

Riksbank hikes by 50bp amid concerns about weak krona

ING Economics ING Economics 09.02.2023 10:53
Policymakers are trying to stem currency weakness but a housing market correction and weaker economic activity suggest there are limits to the number of future rate hikes. The positive reaction by the krona is encouraging, but it will now be up to data to support a further SEK recovery. Short-term turmoil is still a possibility Source: Shutterstock   Sweden’s Riksbank has hiked its policy rate by another 50 basis points, and has made it abundantly clear that it’s worried about the ongoing weakness in the krona. Yet the reality is the Riksbank will need to tread more carefully on rate hikes from now on. That’s clear from its new interest rate projection which points to another 25bp hike in April, and implies there’s a chance it could do the same in July, but that this is likely to be it. The impact of past policy tightening is becoming increasingly evident, in particular in the housing market. Prices are down 15%, and we know Sweden has a comparatively high proportion of households that have a mortgage, and on top of that, the majority are on variable rates. Growth is suffering too, and we’re likely to see a wider impact of the housing problems in consumption and construction as the year goes on. Sweden is likely to be an economic underperformer within Europe. For now, policymakers have half an eye on wage negotiations, which are likely to settle on a higher settlement than in the past. And the near-term policy outlook undoubtedly hinges on the krona, as well as what the European Central Bank decides to do beyond its March meeting. For now, we’re pencilling in one final 25bp hike in March, but wouldn’t totally rule out another over the summer. Read next: Disney Plans To Cut Costs And Jobs, Google Is Now Rolling Out AI Chatbot| FXMAG.COM Riksbank interest rate projections over time Source: Riksbank SEK reaction is encouraging We argued in recent commentaries how a hawkish hike was a necessary step by the Riksbank to help restore confidence in SEK-denominated assets and halt the slump in the krona. The initial market reaction seems to be rewarding today’s rate decision, as EUR/SEK dropped nearly 1% to the 11.25 mark. If those levels hold, we’d be looking at a 40+ big-figure cushion to those March 2009 record highs, which would probably mark a fully-fledged currency crisis in Sweden. Now, the data needs to play its part. We have reasons to believe inflation will start easing in the coming months, although the outcome of wage negotiations could see the jobs market working against a deflationary path. This, and the soft patch of growth data, argues against a straight-line recovery in SEK and short-term turmoil for the krona is still a possibility. We think the Riksbank can be satisfied with EUR/SEK staying around 11.20-11.40 for now.   A sustainable reappreciation of SEK beyond the 11.00 mark against the euro remains the base case for this year, although the path for the Riksbank to fight inflation without triggering an uncontrolled property and economic slump has got narrower, and downside risks remain meaningful. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Mexico’s Central Bank Surprised Markets With A 50bps Rate Hike Once Again

Mexico’s Central Bank Surprised Markets With A 50bps Rate Hike Once Again

Saxo Bank Saxo Bank 10.02.2023 08:43
Summary:  Equities erased early gains with S&P500 falling below 4100 as short-end Treasury yields jumped higher and yield curve inversion deepened to a fresh record. Riksbank’s hawkish surprise, along with Banxico’s, is raising concerns that central banks will have to continue to hike rates. Dollar was off its lows, and Gold pulled back to test the $1860 support again. Crude oil prices slid despite risks of lingering supply disruptions, as demand concerns weighed. China’s inflation data due today ahead of more Fed speakers and University of Michigan survey.   What’s happening in markets? US equities (US500.I and USNAS100.I) slide lower on Thursday; Tesla hits a new cycle high The S&P 500 wiped an earlier 1% jump, ending 0.9% lower on Thursday and 1.3% down on the week. It’s the first time in three weeks the benchmark index is in negative territory. That said, the S&P500 hold a gain of about 16% from its October low. On Thursday, options traders piled into bets the Federal Reserve is targeting a peak rate of 6%, nearly a whole percentage point above consensus. The two-year yield traded near 4.5%, and earlier pushed above the 10-year yield rate, by the widest margin since the early 1980s — This is a sign of fading confidence in the US economy’s ability to withstand additional tightening, and weighed on bank stocks. Alphabet (GOOGL) was also a key laggard as the underwhelming chatbot event continued to drag. Walt Disney (DIS) also reversed its gains after reporting earnings and announcing layoffs. Tesla (TSLA) shares were a top performer rising 3% on Thursday, taking its rally to 100% from its January low, bolstered by signs that demand for its EVs are rebounding - particularly with China out of lockdown. Still, Tesla share are down 50% from their record high. The technical indicators on the weekly and monthly charts look interesting – suggesting buying could potentially pick up over the longer term, as reflected in the MACD and RSI.  Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) jump higher The 2-year note Treasury yield rose 6bps to top 4.5% for the first time since November 30th, which means the bond market is beginning to take the Fed more seriously again. The surprise hawkish announcement from Riksbank likely added to concerns that central banks will continue to hike rates. The 10-year yield was up 5bps taking the Treasury yield curve inversion to 86bps, the widest since the 1980s. Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) gained as optimism returned Hang Seng Index rallied 1.6% and CSI300 bounced over 1.3% after a week-long consolidation. Xiaomi (01810:xhkg), surging 8.5%, was the biggest winner within the Hang Seng Index. Lei Jun, Chairman and founder of the mobile phone and electronic device maker, announced on Twitter in the form of Q&A with a Chatbot that the company is launching its Xiaomi 13 Series mobile phone on 26 Feb. Alibaba (09988:xhkg) climbed 4% following its announcement of a plan to develop a ChatGPT-like chatbot. The hype on AI-generated content and chatbot spilled over to chip makers with Hua Hong (01347:xhkg) and SMIC (00981:xhkg) each rising over 3%. Mobile phone hardware suppliers Sunny Optical (02382:xhkg) and AAC (02018:xhkg) surged 5.7% and 5.9% respectively. The technology space outperformed overall, with the Hang Seng Tech Index climbing 3.2%. Macao casino operators advanced with MGM, surging 9.2% and other operators gaining 3% to 5%. In A-shares, semiconductors, food and beverage, communication, defense, and internet-of-things stocks led the advance. Northbound flows registered a net buying of over RMB 12 billon. Australian equites (ASXSP200.I) likely to end the week lower, with rate sensitive stocks down the most, while banks and insurers lift ahead of RBA saying more hikes ahead The Energy sector is up the most this week, followed by Materials – with activity in China picking up after Luna New Year holidays. The best ASX200 returns this week so far are from Gold mining giant, Newcrest, up 11%, followed by insurance group Medibank up 5%, while regional bank Suncorp is up 4%. On the downside, Block, also known as Square (SQ, SQ2) fell over 9% this week, after rising for the last 6 weeks. ASX tech logistics giant WiseTech (WTC) fell about 10% so far this week, knock it off its record all time high and ending its four-week strong rally with the logistics industry improving. WiseTech has contracts with global logistics giants including UPS, DHL etc.  FX: SEK outperforms on hawkish Riksbank; JPY awaits new governor The big drag on the USD came from the outperformance of the Swedish krona after Riksbank surprised hawkish (read below). However, the dollar bounced back as Treasury yields picked up in wake of a dismal 30yr auction. Even as EURSEK plunged below 11.20, EURUSD rushed back above 1.0750 and came in close sight of 1.0800, although reversing most of these gains in the wake of dollar strength subsequently. GBPUSD also pushed higher to test the 50DMA at 1.2187 but reversed towards 1.21 later. USDJPY finding it difficult to go below 130 with PM Kishida saying he doesn’t want to surprise the markets with his Governor choice, which is shifting the consensus towards safer bets. AUDUSD failed another attempt at 0.70, awaiting RBA’s quarterly outlook. Crude oil (CLH3 & LCOJ3) dips as investors clip profits WTI oil traded 0.5% lower at $78.06, ending its best three-day rally since December. Some investors moved into profit taking mode, worried about a sagging US economy and that it could drag on oil demand. As the Fed has turned marginally hawkish recently, a large draw in inventories recently is also sending caution about oil demand. This comes despite supply disruptions with exports of Azeri oil from Turkey unlikely to resume until late next week. This has wiped out about 600kb/d of shipments. Meanwhile, Kazakh crude production has been reduced by about 200kb/d due to unplanned maintenance work. Gold (XAUUSD) back lower to test $1860 Gold turned lower again as the surge higher in 2-year yields and the US dollar strengthened, and was testing the $1860 support in early Asian trading hours. A marginally hawkish stance by the Fed members over the last week, coupled with fears from a very strong job market report, continues to bolster the view that interest rates will need to keep rising to contain inflation. Still, if gold manages to stay above the 38.2% retracement of the run up from early November at $1828, the broader uptrend can remain intact.  Read next: Credit Suisse Reported Its Biggest Annual Loss Since The 2008, Ukrainian President Is Asking For Help And More Weapons In Brussels| FXMAG.COM What to consider? Riksbank’s 50bps rate hike boosts krona The Riksbank hiked the 50 basis points to 3% and guided for “probably” more tightening to come, but importantly also announced an acceleration of bond sales to reduce the balance sheet (QT) in April, which helped boost 10-year Swedish Government bond yields a chunky 20 basis points today, bringing them suddenly close to par against German yields. New Govenror Thedeen’s u-turn on the krona policy helped to bring EURSEK below 11.15, with the 11-handle and 200DMA at 10.81 now in focus. US jobless claims rose but still sub-200k Initial jobless claims rose to 196k from 183k, and above the expected 190k. Continued claims also surpassed expectations and printed 1.688mln (exp. 1.68mln), above the prior 1.650mln. While there is a pick-up in claims, it must be noted that it comes from a low level and still continues to signal a tight labor market. German inflation slows to five-month lows A delayed preliminary inflation print for January was released in Germany yesterday and it retreated to 9.2% YoY from 9.6% in December as government aid to ease the burden on households from soaring energy costs helped ease price pressures. Still, the disinflationary pressure appears to be slower than expected, and the ECB will have to keep its foot on the pedal. Hawkish outcome from Mexico’s central bank Banxico surprised markets with a 50bps rate hike once again and signalled another, smaller hike at the next meeting. Expectations were for a final 25bps rate hike. This appears to be in trend with what we have seen from RBA thins month, as also from the Reserve Bank of India, suggesting broad inflation pressures are still continuing to challenge central banks from considering a pause. China inflation is expected to inch up China’s Inflation may have accelerated as the headline CPI is forecasted to bounce to 2.2% Y/Y in January from 1.8% in December. A surge in in-person service consumption after the reopening may have underpinned some price increases but the upward pressure on the general level of inflation has remained moderate. Rises in vegetable and fruit prices were likely damped by a decline in pork prices. The decline in producer prices is expected to narrow to -0.4% in January from -0.7% in December as industrial metal prices bounced offsetting a decline in coal prices. Australian trade update: Commodity optimism picks up after Lunar New Year, Chinese students to return to AU, RBA inflationary forecasts due today. Could Australian wine tariffs from China be dropped? AUDUSD on watch. Aussie dollar volatility continued this week, with the AUDUSD losing 2% over the last 5 sessions, mirroring commodity prices pulling back. But optimism has started to pick up. The Copper (HG1) price fell 0.6% over the last five sessions, moving up yesterday, while the Iron ore (SCOA) price is 0.6% down on the week, but picked up over the few sessions, with construction kicking off in China - after the Luna New Year break. Plus, a top China economist said interest rates could be cut next quarter. This supports further commodity buying, on top of Fortescue Metals, BHP and Rio Tinto’s quarterly outlooks, hinting China demand will pick up in 2023. China also docked its first Australian coal import shipment in two years yesterday, which supports the Aussie dollar over the medium to long-term, with the market to perhaps see more coal orders. Regardless, the coal export to China will add to quarterly GPD. Supporting Australian GDP this quarter as well - will be the 50,000 influx of Chinese students expected to arrive in Australia this month - ahead of the start of semester. Beijing’s government ruled that degrees earnt online would not be accredited any more. The next catalysts for the AUDUSD might come from the RBA’s quarterly economic forecasts and policy outlook released today. We think the RBA can afford to make upward revisions to its underlying inflation forecasts, given energy prices are expected to pick up later this year - as the AEMO alluded to. Lasty, consider China’s commerce ministry is willing discuss tariffs imposed on Australian wine that began in 2020. Should the tariffs be dropped or reduce, it may encourage China to buy Australian wine again – and add to AU GDP.   For what is ahead at markets this week – Read/listen to our Saxo Spotlight. For a global look at markets – tune into our Podcast.   Source: Market Insights Today: Yield curve inversion unnerves investors – 10 February 2023 | Saxo Group (home.saxo)
Sweden: How the Riksbank has made the krona’s path to recovery even narrower

Saxo Bank Podcast: Riksbank Meeting Blasted The Swedish Krona Higher

Saxo Bank Saxo Bank 10.02.2023 10:57
Summary:  Today we look at the US market turning lower again yesterday and closing down through an important level that was providing resistance on the way, setting up the technical situation of a risk of downside capitulation. Higher US yields weighed and the US dollar rallied yesterday, although the big news in FX was a watershed Swedish Riksbank meeting that blasted the Swedish krona higher. Breaking this morning was the unanticipated news of the nominee for BoJ Governor, which sparked JPY volatility. We also delve into the disastrous news from Adidas this morning, the earnings calendar this week, commodity developments, the latest on natural gas and the week ahead macro calendar. Today's pod features Peter Garnry on equities, Ole Hansen on commodities and John J. Hardy hosting and on FX. Listen to today’s podcast - slides are available via the link. Follow Saxo Market Call on your favorite podcast app: Apple  Spotify PodBean Sticher If you are not able to find the podcast on your favourite podcast app when searching for Saxo Market Call, please drop us an email at marketcall@saxobank.com and we'll look into it. Read next: Twitter Co-Founder Jack Dorsey Comments New Twitter's Owner| FXMAG.COM   Questions and comments, please! We invite you to send any questions and comments you might have for the podcast team. Whether feedback on the show's content, questions about specific topics, or requests for more focus on a given market area in an upcoming podcast, please get in touch at marketcall@saxobank.com.   Source; Podcast: Risk off, BoJ Governor nominee, Adidas dump, SEK soars | Saxo Group (home.saxo)
ECB cheat sheet: Difficult to pull away from the Fed

New Zealand dollar did better than AUD last week. Riksbank's minutes were seen hawkish

Enrique Díaz-Álvarez Enrique Díaz-Álvarez 28.02.2023 09:33
Evidence continues to accumulate that inflation worldwide is far from tamed, and that increases in rates so far have been inadequate to the task of bringing it back to target. Inflation data is again surprising to the upside, economic growth is rebounding worldwide and labour markets remain very tight. In this context, a 6% handle in terminal rates remains a distinct possibility, and not just in the US. Markets are not taking it well. Bonds and stocks are again falling together, and the dollar is rallying on the back of rising expectations for Federal Reserve rates and its status as a safe-haven. The dollar rallied strongly against all G10 currencies, and most major emerging market ones.   This week, attention will be focused on key economic data coming out later in the week, particularly out of the Eurozone. The global PMIs of economic activity will be out on Friday, though this should move little from the preliminary numbers already released. The day before, a critical flash inflation report out of the Eurozone for the month of February. Another upward surprise here may propel market pricing of the Eurozone terminal rate past the 4% level, which we think is still modest considering the task at hand for the ECB. We would expect that to buoy the euro back towards the top of the recent range. Figure 1: G10 FX Performance Tracker [base: USD] (1 week) Source: Refinitiv Datastream Date: 27/02/2023 GBP Last week’s UK PMIs of business activity provided a strong positive surprise, swinging back squarely towards expansion for the first time in eight months and contradicting directly the recent recession narrative. While sterling lost ground against the US dollar, as did every other G10 currency, it managed to end up near the top of the performance rankings. Figure 2: UK PMIs (2021 – 2023) Source: Refinitiv Datastream Date: 27/02/2023 Sentiment seems so bearish on the pound that it’s hard to see who the next seller will be, and there is also some optimism in the air around talks to finalise a Brexit agreement on trade arrangements with Northern Ireland with the European Union. There isn’t much on the docket this week in the UK, so expect the pound to trade off events elsewhere. EUR Data flow out of the Eurozone last week should have put to bed any notions that the European Central Bank is near the end of the hiking cycle. The PMIs of economic activity for February surprised squarely to the upside and effectively ended any possibility of a Eurozone recession, in our view. Further, the inflation report was revised upwards, both in its core and headline components. This week we expect more of the same, with a flash prices report that will show, again, no sign of a downward trend in core inflation. The ECB, as we expected, is flagging increasingly the stickiness of this key inflation sub index as a source of concern and justification for its hawkish rhetoric. We expect this to put a floor under the common currency soon. USD Economic data out of the US confirmed that the economy is still firing on all cylinders. Data on the housing market and business and consumer sentiment all surprised to the upside. More importantly, so did the Federal Reserve’s preferred inflation gauge, the PCE index, which has erased any sign of a downward trend and actually appears to be on the rebound. Figure 3: US PCE Index (2016 – 2023) Source: Refinitiv Datastream Date: 27/02/2023 There isn’t much on the calendar in the US this week, and markets are focusing on the next critical data point in the week following, the labour market report for February. Therefore, speeches from Federal Reserve officials will be in focus this week. We expect most communications to once again strike a hawkish tone, keeping the door open to at least three more 25bp rate hikes from the FOMC at the next three policy meetings in March, May and June. JPY The yen was one of the underperformers in the G10 last week. Newly appointed Bank of Japan governor Ueda, who will assume the post in April, struck a rather dovish tone during the Lower House hearings on Friday. There has been intense speculation that the BoJ will begin normalising rates later in the year, though Ueda stressed that policy will remain loose for the time being, while failing to comment on the possibility of higher rates. This lack of a hawkish shift has somewhat alarmed yen bulls, and partly contributed to the recent sell-off in the yen. February inflation data will be released in Japan on Friday, with investors bracing for another fresh multi-dace high in the critical core index. CHF Despite a good start, the Swiss franc ended last week lower against the euro and underperformed most of its G10 peers. At least part of this underperformance may be due to the widening gap in interest rate expectations between Switzerland and its peers. The market expects higher rates than before, but the extent of recent repricing has been less significant than in the US or the Eurozone. Read next: Pfizer Is In The Early Stages Of An Acquisition Of Biotech Company Seagen, Twitter's Staff Has Shrunk Since Elon Musk Took Over| FXMAG.COM In contrast to the previous rather quiet week, this one promises to be quite interesting in terms of macroeconomic releases from Switzerland. The focus will be on the fourth quarter GDP data (Tuesday) and retail sales and PMI data (Wednesday and Thursday respectively). Solid readings may support the currency, as on the one hand, they could point to a ‘soft landing’, and on the other add the arguments in favour of more aggressive monetary policy tightening. AUD Risk-sensitive currencies sold off hard against the US dollar last week, led by the Australian dollar in the G10, which sank by around 3%. Last week’s Reserve Bank of Australia meeting minutes were actually rather hawkish. RBA members stressed their view that additional rate hikes would likely be required in the coming months, citing the upside surprises in wages and inflation. The bank even acknowledged that discussions were had on the possibility of a 50bp hike at the last meeting, and that a pause in the tightening cycle was not an option on the table. Investors shrugged off these hawkish remarks in favour of news elsewhere, notably the waning in optimism surrounding China’s economic recovery. Fourth quarter GDP data will be released in Australia on Wednesday, as will the monthly CPI print for January. Upside surprises in either or both of the upcoming growth and inflation readings would reinforce the narrative that the RBA still has some way to go in raising rates, and could provide some respite to the recent move lower in AUD. NZD The New Zealand dollar held up better than its Australian counterpart last week, in no small part due to the hawkish message from the RBNZ. New Zealand’s central bank raised rates by another 50bps last week, while noting that core inflation remains too high and that near-term inflation expectations were elevated. The bank noted that it was too soon to ascertain the economic implications of the recent cyclone, though the weather disaster is likely to keep price pressures elevated and make it harder to the RBNZ to bring down rates of inflation in a sustainable manner. Figure 4: RBNZ Base Rate [%] (2010 – 2023) Source: Refinitiv Datastream Date: 27/02/2023 Markets are currently only pricing in a 25bp move at the next meeting in April, though we suspect that the central bank will place greater emphasis on the inflation implications of the cyclone, rather than growth, and that another 50bp hike is very much on the table. CAD Continued signs of a downtrend in last Tuesday’s inflation data can be seen as a bearish signal for CAD, as it should take some pressure off the Bank of Canada to continue raising interest rates. Markets see an outside chance of one more hike from the BoC at the next couple of meetings, though we continue to think that it will stand pat for now, particularly given that core inflation has shown encouraging signs of trending back towards the bank’s target. Attention this week will be on a handful of macroeconomic data releases in Canada, notably Tuesday’s Q4 GDP data print and Wednesday’s manufacturing PMI. SEK Last week’s meeting minutes from the Riksbank were seen as hawkish, reinforcing the recent shift from new governor Thadeen. The krona outperformed its high-risk major peers in response to heightened rate hike bets, and was able to end the week around the middle of the G10 performance tracker. We suspect that volatility levels in SEK could be ratcheted up a notch or two this week, with a handful of data releases likely to be closely watched by market participants. We will be keeping a close eye on Tuesday’s fourth quarter GDP print and, perhaps more importantly given their timeliness, the latest manufacturing and services PMIs on Wednesday and Friday respectively. NOK There was little in the way of major market moving news out of Norway last week, with the krone largely driven by general market sentiment. Global oil prices, which tend to be a key factor underlying NOK performance, also ended the week more-or-less unchanged. This can also partly explain the limited volatility in EUR/NOK. We should have slightly more to report next Monday, with a handful of economic data releases scheduled for this week. This includes January retail sales (Monday), the manufacturing PMI (Wednesday) and labour report (Friday). CNY The yuan spent last week on the backfoot, selling off by more than 1% against a broadly stronger US dollar. USD/CNY rose to its highest level since December, continuing its move toward the key psychological level of 7.0. The yuan also underperformed most of its emerging market peers. While a large part of the shift in USD/CNY can be attributed to the stronger greenback, some of it appears to be due to concerns over US-China relations in the context of Taiwan. The topic came back into focus after the Wall Street Journal reported that the US is positioning to increase its military presence on the island to 100-200 troops from around 30 a year ago. This week will be a treat for China watchers, as fresh PMI data will give us a better idea of the pace of recovery in the Chinese economy. January data was impressive, and we have reasons to believe February’s readings will indicate a vigorous rebound after the end to zero-COVID. The NBS data will be released on Wednesday, and the Caixin PMIs on Wednesday and Friday. To stay up to date with our publications, please choose one of the below: 📩 Click here to receive the latest market updates👉 Our LinkedIn page for the latest news✍️ Our Blog page for other FX market reports 🔊 Stay up to date with our podcast FXTalk Source: Dollar rebound continues as inflation fears return to markets | Ebury UK
Sweden: How the Riksbank has made the krona’s path to recovery even narrower

Riksbank preview: A hawkish 50bp hike to support the krona

ING Economics ING Economics 20.04.2023 16:50
Sweden’s economic outlook remains challenging, but core inflation is too high and the Riksbank looks determined to support the krona. We expect a 50bp hike next Wednesday and a signal that rates could peak near 4%. This can help the krona, though short-term headwinds remain out of the Riksbank’s control Erik Thedéen, governor of the Riksbank The wage bullet was dodged, but core inflation is too high The big news since Sweden’s Riksbank last met in early February is that the long-awaited wage negotiations have resulted in a deal which is generally being viewed as good news for the central bank. A two-year pay deal of 7.4% – while higher than the last settlement agreed a few years ago – suggests the risk of a wage-price spiral is minimal. Headline inflation will almost certainly be lower when the next deal is negotiated.  On paper, the latest inflation data was also welcome news, in that annual CPIF slipped back to 8% in March, some way below December’s 10.2% peak. But the reality is that core inflation is still well above the Riksbank’s February forecast – too high for comfort, and points to another 50bp rate hike this month. That’s despite the activity data looking bleak. February’s monthly GDP held up, but the fourth quarter of last year looked dreadful and real wages remain under pressure. Core inflation remains well above the Riksbank's February projection Source: Riksbank, Macrobond Housing concerns linger, despite some tentative stabilisation The housing market is also a key concern. More than 60% of Swedish households hold mortgages expiring within one year or less, and house prices are down roughly 15% from the 2022 peak. March data show the first signs of tentative stability, with apartment prices rising for the first time in a year, but it’s too early to say the market has reached a trough. House price growth in Sweden Source: Valueguard, Riksbank Riksbank still sounding hawkish, mostly to help SEK Even if a concerning backdrop for the housing market and the broader economy points to a more cautious approach to tightening, Governor Erik Thedéen has been resolutely hawkish since taking office earlier this year. He highlighted in February that despite recognising Sweden is indeed “interest rate sensitive”, the consequence of “entrenched inflation” would be even more costly. Part of this hawkish narrative is undoubtedly linked to the currency. Recent Riksbank comments have signalled unease with krona weakness, which is close to post-global financial crisis lows on a trade-weighted basis. We’re therefore expecting a 50bp hike next week, and we think the updated rate projections could go beyond what markets are pricing and signal a peak rate of roughly 4%, up from just below 3.5% last time. Remember that the Riksbank meets only five times a year, much less than other central banks, and has to make each meeting count. Policymakers have emphasised in the past that staying out in front of the European Central Bank is a priority. Read next: World trade to see big shifts and weaker growth in 2023| FXMAG.COM In practice though, taking rates that high could prove challenging given the economic and housing backdrop, and we’d argue that even another 25bp hike in June is not guaranteed (though it’s our base case for now). There has been some public debate about a potential Riksbank FX intervention, though for now we think it’s unlikely. It would be a high-risk move, but policymakers may not completely rule it out. Ultimately, an implicit threat of interventions may help support the krona. Riksbank interest rate projections and our forecast Source: Riksbank, Macrobond, ING The impact on SEK can be positive, but market factors remain dominant The key question is: will a hawkish surprise or at least a reiteration of a hawkish stance be enough to either lift or at least prevent the krona from slumping further? One important point about SEK is that it no longer embeds the amount of idiosyncratic risk related to the domestic economy it did back in February. This is demonstrated by our EUR/SEK short-term fair value model, which no longer shows pronounced overvaluation (I.e. risk-premium related to Swedish economic concerns). This means two things: first, that the Riksbank’s hawkishness has helped re-establish some confidence in the krona, and second, that the recent SEK weakness is primarily due to market dynamics – not least, EUR strength. EUR/SEK no longer overvalued Source: Refinitiv, ING   Ultimately, the Riksbank can have a positive impact on the krona by sounding hawkish, and we think that the balance of risk is tilted to the downside for EUR/SEK next week. Still, a sustained improvement in global risk sentiment and an easing in idiosyncratic appreciating EUR pressure are necessary conditions for SEK to enter a more sustainable upward trend, especially considering how much risk premium can be built back into the krona in relation to Swedish economic troubles. All in all, we still think that the path for a krona recovery in 2023 will be a narrow one, but 75bp of extra tightening and a hawkish (currency-oriented) stance by the Riksbank, paired with Europe’s good economic performance (to which SEK has a high-beta), can favour a sustainable return to sub-11.00 levels in EUR/SEK in the second half of the year. We target 10.75 as the year-end value. In the shorter run, ongoing tightening by the US Federal Reserve and the residual effects of the banking crisis could still weigh on sentiment and offer support to EUR/SEK around 11.20/11.30, with spikes to 11.50 possible in periods of risk aversion and/or resurging risk premium on the krona. Read this article on THINK TagsSEK Riksbank Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
FX Daily: Hawkish Riksbank can lift the krona today

FX Daily: Hawkish Riksbank can lift the krona today

ING Economics ING Economics 26.04.2023 13:22
We expect a 50bp hike by Sweden’s Riksbank today, and despite the domestic economic woes, signals that rates will peak at close to 4.0%. This can trigger a krona rally today. Elsewhere, we’d be wary of chasing the dollar rebound seen yesterday, given the raising bets on Fed rate cuts after fresh US banking concerns USD: Be careful chasing the dollar rebound The release of quarterly earnings in the US continues to paint a better picture for American corporates, with big tech companies beating estimates yesterday. However, concerns about the US banking sector have returned after First Republic’s shares dropped 49% following the larger-than-expected drop in deposits and announced restructuring plans. Ultimately, a risk-off mood has prevailed, despite the overall contagion effect having been significantly more contained than in previous instances in March: the 3-month FRA-OIS spread ticked higher to 32bp, but is a far cry from the 50bp and 60bp peaks seen last month. In FX, this still translated into a fully-fledged flight to safety, with the yen outperforming and the dollar recovering ground yesterday. High-beta currencies came under pressure, particularly the Norwegian krone, which is the least liquid currency in G10 and inevitably very vulnerable to adverse swings in risk sentiment. The dollar’s rebound followed its natural correlation with risk aversion yesterday, although we signal how in multiple instances when concerns about the stability of the US banking system rose in the past month-and-a-half it was the dovish repricing in Fed rate expectations that had a more tangible short-term impact on the dollar. We would therefore warn against chasing a dollar rally that is fuelled by idiosyncratic negative news on a US bank, especially in the run-up to the FOMC meeting. Read next: Base effects distort Hungarian wages data| FXMAG.COM The dollar hasn’t really connected with the dovish repricing in Fed rate expectations, with rate cut expectations that have risen steadily since the end of last week. From 55bp of easing priced in by year-end on Friday to 75bp this morning. We suspect that some help to the dollar momentum shown yesterday would need to come from good US data over the remainder of the week. Ahead of the more important GDP and PCE figures tomorrow and Friday, we’ll take a look at durable goods orders and wholesale inventories today. All in all, we think the balance of risk is tilted to the downside for the dollar today, as some stabilisation in sentiment would pave the way to at least partly re-link with falling Fed rate expectations. DXY may slip back to the 101.00/101.50 range by the end of the week. Francesco Pesole EUR: Narrow rate differential still points higher EUR/USD continues to hover around the 1.1000 mark, and we think it can find some fresh support above that level if some risk sentiment stabilisation offers a chance to reconnect with a favourable rate differential. The eurozone calendar is quite empty and the predominance of news coming from the US on the banking and equity sector leaves EUR/USD even more driven by the dollar leg. As discussed in yesterday’s FX Daily, the 2-year EUR-USD swap spread has narrowed further thanks to the combined effect of rising dovish bets on the Fed and the reinforcement of hawkish pricing in the EUR curve. The spread is currently at -66bp, the narrowest since 2020 when it peaked at -53bp. Elsewhere in Europe, the National Bank of Hungary walked the talk yesterday (here is our full meeting review note), beginning its dovish pivot with a rather symbolic step. We believe the 450bp technical cut in the top end of its rate corridor might be followed by cuts in the effective rate in the coming months, based on the re-tuned forward guidance. However, a more cautious approach by the central bank means good news for the Hungarian forint. Francesco Pesole GBP: Room to climb back The pound moved broadly in line with other pro-cyclical European currencies yesterday, and we see room for a recovery as the dollar’s good momentum may struggle to last. As is the case for EUR/USD, GBP/USD can count on an improved rate differential, which has recently moved back into positive territory (2-year swap rate as reference) by around 25bp and is at its highest since October 2022. We see room for Cable to re-test the recent 1.2543 highs by the end of the week in a less unfavourable risk environment, and thanks to the pre-Bank of England meeting hawkish narrative which is still offering decent support to the pound. Francesco Pesole SEK: Riksbank hike can help SEK The Riksbank will raise interest rates again this morning, and the consensus is centred around a 50bp hike to bring the policy rate to 3.50%. This is also our call (here is our full preview) and what markets are fully pricing in, so the market impact will mostly be driven by: a) the new economic projections and b) any forward-looking language. When it comes to the projections, core CPIF inflation forecasts will need to be revised higher, since it has overshot the Bank’s previous projections, although the really important bit for the market will be the updated rate path projections. Here, we think that the Riksbank will be wishing to sacrifice a bit of credibility to maintain a very hawkish tone, and we expect them to signal a peak rate close to or at 4.0% and no rate cuts for the whole projection period. This should, in practice, prove unfeasible. Even one more rate hike – despite being our base case – would be very easy to deliver given ongoing economic strains in Sweden, and rate cuts will likely need to be delivered next year. However, the Riksbank needs to focus on its short-term goal, which at the moment is to support its currency and send a signal of trust in its economy and financial system by staying resolutely hawkish. The decent performance of SEK compared to peers in the past few days suggests that markets had started to position for a hawkish Riksbank today, but EUR/SEK still trades in modest overvaluation (around 0.5%) according to our short-term fair value model and we think the Riksbank can push the pair to the 11.20 mark with a convincing hawkish message today. We remain doubtful that the pair can fall much further in the near term given lingering headwinds to the krona (global risk sentiment, concerns about the Swedish housing and economic situation). Francesco Pesole Read this article on THINK TagsRiksbank FX Daily FX Dollar Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Riksbank: Growing dissent hinders efforts to support the krona

Riksbank: Growing dissent hinders efforts to support the krona

ING Economics ING Economics 27.04.2023 12:20
The Riksbank hiked by 50bp as expected, and signalled another 25bp move in June or September. However, two members argued for a smaller increase today and rate projections showed the next quarter-percentage hike should be the last one. Governor Thedeen kept pointing to the need for a stronger krona, but the dovish tilt makes SEK-supporting efforts harder Erik Thedéen, governor of the Riksbank A dovish 50bp hike The Riksbank increased its policy rate by 50bp today to 3.50%, as widely expected, and signalled it will probably deliver another 25bp hike in either June or September. The updated rate projections show that should be the last move in the Riksbank tightening cycle, with rates peaking at 3.75% and being held around that level for the foreseeable future. This was the first bit of the dovish surprise: market expectations had priced in a peak rate higher than 3.75% and part of the consensus (including ourselves) had expected the new projections to display a 4.0% peak rate. The other element of surprise came from the explicit dissent by two members of the Executive Board (Deputy Governor Anna Breman and Deputy Governor Martin Floden). They both argued in favour of a 25bp hike today and against the rate path projections, which they judged too hawkish in light of “well-anchored inflation expectations, moderate wage increases and the weak and downward-revised forecast for domestic demand”. The other projections included an upward revision in CPI and CPIF inflation – especially the core measure (excluding energy) - as well as for the size of the GDP contraction in 2023 (from -1.1% to -0.7% year-on-year). New rate projections Source: ING, Riksbank Words aren't enough to support the krona It is clear that there is a growing divergence of views within the Riksbank Board, and that today’s decision was probably the result of some sort of compromise, similar to what we saw at the latest European Central Bank meetings. The concerns of the Riksbank’s doves are reasonable, and while the anchored inflation point is a debatable one, the housing and growth fears are indisputable. As shown below, a higher peak rate meant that the projected slump in house prices is also longer-lasting, despite the slightly better-than-expected house price data in the first quarter. House pain to be prolonged Source: ING, Riksbank   We could see how Governor Erik Thedeen remained focused on his efforts to support the krona. His verbal attempts to support the currency have ranged from claiming that there are strong arguments in favour of SEK strengthening to highlighting how a persistently weak krona may affect policy. Unsurprisingly, those attempts did not prevent EUR/SEK from staging a big rally today as SEK dropped on the dovish surprise at the same time as the EUR was finding idiosyncratic strength. We think that, more than the signal that rates will peak at 3.75%, it was the explicit dissent within the board that hit the krona today, and may well hinder the ongoing effort by Governor Thedeen to prop up the currency. FX intervention? Still a risky path Ultimately, this may be raising the chances that the Riksbank will have to take FX intervention into consideration. We continue to doubt an intervention campaign is a viable option for the Riksbank, considering the relatively contained amount of FX reserves and political hurdles that accompany unilateral FX buying for developed countries. Read next: ECB preview: a 25bp compromise rate hike| FXMAG.COM For now, we think that further SEK depreciation may see the Riksbank react with more verbal intervention including the threat of FX intervention to test the market’s reaction function. One key issue is still that many headwinds to the krona are beyond the Riksbank’s control (especially linked to idiosyncratic strength in the euro and risk sentiment swings) and the economic strains in Sweden have clearly dented the attractiveness of the krona from a fundamental perspective.   Our view is that EUR/SEK will remain around 11.30/11.40 in the near term, with risks of a spike to the 11.50 area in periods of risk aversion or should some risk premium related to the Swedish housing market/economic outlook be built back into the pair. The dissent that has emerged within the Riksbank’s Board today poses upside risks to our baseline scenario for a descent below 11.00 in the second half of the year, although a generalised improvement in risk sentiment as the Federal Reserve's tightening cycle comes to an end, and the krona’s high beta to Europe’s decent growth story still point to a stronger SEK into year-end barring a material deterioration in the housing and economic outlook in Sweden. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Sweden: How the Riksbank has made the krona’s path to recovery even narrower

Sweden: How the Riksbank has made the krona’s path to recovery even narrower

ING Economics ING Economics 19.05.2023 08:30
EUR/SEK is approaching the April highs, and this is not just a risk sentiment issue. The emergence of dissent within the Riksbank and lower-than-expected inflation figures are leaving the krona without a solid floor. Near-term vulnerabilities remain elevated, and our baseline scenario for a recovery in the second half of the year faces rising risks Softer data has been helping the Riksbank doves' case Against a backdrop of persistent krona weakness, the assumption going into the April Riksbank meeting was that the bank would deliver both a 50bp rate hike and a resolutely hawkish message in a bid to support the currency. While the bank delivered on the former, the overall messaging was more nuanced. The Riksbank’s closely-watched interest rate projection told us that we’re at or very close to the peak for rates, and the unexpected dissent of two board members (Deputy Governor Anna Breman and Deputy Governor Martin Floden) in favour of a smaller hike, added a dovish spin to what otherwise was a substantial interest rate hike. The subsequently-released meeting minutes revealed that this dissent wasn’t ultra-dovish per se. Neither Breman nor Floden ruled out further hikes, but both saw signs of cooling inflationary pressure and lower inflation expectations. The data released since the April meeting has largely endorsed that view. Both core and headline inflation came in below expectations last month, with the core measure (excluding energy) slowing from 8.9% to 8.4%. The highly-regarded Prospera survey of inflation expectations has continued to decline, with CPIF seen at 2.3% in two years and at 2.1% in five years, a 0.1pp decline in both gauges compared to a month earlier. Despite that, Floden (one of two dissenters) noted there’s “still some way to go before we are close to the inflation target”. On housing – an area where Sweden stands out as being particularly vulnerable – we have seen tentative signs of price stabilisation. But expectations overwhelmingly point to further weakness, while the recent downgrade to junk status for SBB’s debt (one of Sweden’s largest landlords) and subsequent dividend pause was a reminder of the ongoing risks associated with the Swedish property sector given the rise in interest rates. Sweden CPI and the krona both declining Source: ING, Refinitiv The implications for SEK are negative In spite of all that, we don’t think the Riksbank’s strategy has fundamentally changed. The April meeting minutes didn’t show any significant divergence in views on how to tackle inflation. And that means that another 25bp rate hike will likely be delivered as promised – we think probably in June – and that might be followed by more should the data argue for it. What has changed, however, are the currency implications. New Governor Eric Thedeen has been resolutely hawkish and explicit about needing to support SEK, with some relative success when comparing the krona’s performance against other pro-cyclical peers. But the April meeting was a turning point for the krona, as we argued at the time. The signals contained within the interest rate projection, the unexpected division within the board, and the subsequent dovish data have all made SEK more vulnerable in the near term. Hawkish messaging was arguably the Riksbank's primary tool to support SEK, and it’s hard to see that narrative being rebuilt in June, especially if inflation continues to move in the right direction. As Floden himself admitted recently, the Riksbank may want a stronger currency, but there’s not a lot it can do about it. More SEK weakness might push the Riksbank closer to considering FX intervention, but we have stressed multiple times how threatening intervention seems more likely to us than actually deploying this, given the relatively low ammunition in terms of reserves. Ultimately, while the Riksbank has sought to stay out in front of the European Central Bank on rate hikes, the reality is that as the absolute level of interest rates grinds higher, the trade-offs involved for the housing market and broader economy are mounting. Policymakers will be hoping that the prospect of Federal Reserve rate cuts on the horizon, coupled with the end of the ECB’s hiking cycle over the next few months, can remove some of the pressure it's currently facing. More troubles for SEK before a recovery So where does this leave us with the SEK outlook? We think the krona will remain very highly vulnerable to external headwinds, and even with a recovery in risk sentiment, it may lag other pro-cyclical currencies. Heading into the 29 June meeting, there is now a non-negligible possibility that the Riksbank might pause and delay the promised 25bp hike till September. Much will depend on CPI figures for May, which will be released on 14 June, but our base case is that they will deliver the last hike in June and then pause.   On the back of those significant downside risks in the near term, EUR/SEK may well break through the 11.43 April highs and test the 11.50/11.60 area unless the FX market shifts more decisively in favour of high-beta currencies. Even in that scenario, we think EUR/SEK should still find support around 11.20/11.25 given the Riksbank’s unfavourable narrative for SEK. In the longer run, we still think that a stabilisation in risk appetite, and a rotation from the dollar to favour European currencies in the second half of the year can help a gradual decline to the 11.00 area in EUR/SEK. But the Riksbank has likely made the path for the SEK recovery an even narrower one.   Read this article on THINK Tags Swedish krona Sweden central bank Riksbank Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Eurozone Inflation Softens: Impact on European Currencies

Eurozone Inflation Softens: Impact on European Currencies

ING Economics ING Economics 07.06.2023 08:46
EUR: European currencies still unloved The euro continues to suffer from a softening inflation story in the eurozone. Yesterday, April’s report on consumer expectations showed a considerable drop (12-month gauge down to 4.1% from 5.0% in a month), which triggered a rally in the euro area’s front-end yields. This has prevented any re-tightening in the 2-year EUR-USD swap rate gap, despite the slight decline in Fed hawkish expectations after Monday’s US ISM numbers.   While easing inflation should build a case for the doves, ECB communication has not seen drastic changes as we head into next week’s policy announcement. Yesterday, President Christine Lagarde reiterated her call for more tightening, and her hawkish tone is probably a key factor keeping markets attached to the 40-45bp pricing for the July meeting. We have other speakers to keep an eye on today. Barring major dovish remarks, and unless a BoC hike has a positive spill-over on the dollar, we feel EUR/USD can remain anchored to 1.0700 for now.   Elsewhere in Europe, pressure on Scandinavian currencies has resumed. EUR/SEK is trading at 11.684 this morning: the intra-day all-time print is at 11.79, and as we have reiterated multiple times in recent publications, the lack of any support from the Riksbank is making it hard to pick a top for the pair in the near term. The financially-distressed Swedish landlord SBB is reportedly denying rumours about discounted sales of its business units, but a default warning from creditors has emerged and the centrality of the firm in the Swedish real estate space means more risk premium (related to a property market collapse) could be priced into SEK now. A recovery for the krona seems unlikely in the near term.
SEK Update: Encouraging Data Offers Relief Amid Growth Concerns

SEK: Higher Core CPI Boosts Krona's Prospects Amidst Currency Crisi

ING Economics ING Economics 14.06.2023 14:03
SEK: Higher core CPI good news for SEK In the midst of a quasi-currency crisis in Sweden over recent weeks, we had indicated today’s CPI release as a potentially pivotal moment for the krona. This proved to be the case. Both core and headline inflation for May came in hotter than expected: YoY readings were 9.7% for CPI (exp. 9.5%), 6.7% for CPIF (in line with consensus), and 8.2% for CPIF excluding energy (exp. 7.8%). This last core gauge is the one that the Riksbank is mainly focussing on: it declined faster than expected in April, from 8.9% to 8.4%, but it clearly decelerated it slowdown in May, to 8.2%.   The implications for monetary policy, and for the krona, are non-negligible. A key reason behind the recent SEK weakness was effectively the lack of support by the Riksbank after a dovish turn at the April policy meeting. Since then, except for verbally protesting a weak krona, the Bank had failed to offer a convincingly supporting narrative to the domestic currency (i.e. via rebuilding some hawkish narrative).   These higher inflation numbers offer an opportunity for the two dissenters to scale back their dovish opposition at the 29 June meeting and to allow rebuilding of that hawkish messaging (hike and signal more to come) that can help a more sustained recovery for SEK.   We cannot unsee the significant domestic downside risks for SEK (SBB, troubled economic and real estate outlooks), but the Riksbank has an opportunity to give a lifeline to the krona and wait for more market stabilisation to do the heavy lifting and bring EUR/SEK closer to 11.00 later in the year.   We are slightly more constructive on the EUR/SEK near-term outlook after today, although we warn against excessive confidence in the Riksbank adopting what we see as the best policy for the currency. Risks of spikes to 11.60-11.70 remain elevated, but a hawkish Riksbank could now take the pair sustainably below 11.50 by the summer.
Norges Bank Takes Bold Steps: Signals Strong Tightening to Strengthen Weaker Krone

Norges Bank Takes Bold Steps: Signals Strong Tightening to Strengthen Weaker Krone

ING Economics ING Economics 22.06.2023 12:27
Norges Bank turns hawkish in fight against weaker krone Norges Bank has not only hiked rates faster than expected this month, but is also signalling plenty more tightening to come. We suspect the newly forecasted peak rate of 4.25% will be hit by the end of the third quarter. This puts NOK in a stronger position, especially against its closest peer SEK.   Norway’s central bank has hiked rates by 50 basis points, more than the 25bp that was expected – although in truth the consensus was pretty divided. What really stands out is the new interest rate projection, which is the output of Norges Bank’s model and shows where policymakers expect rates to go over the coming months. Back in March, that pointed to a peak rate of 3.5%, which implied the bank would have hiked by 25bp this month before pausing. Not only has the central bank gone further than that at this meeting, but it is now signalling a peak rate of 4.25% later this year – some 60bp higher than previously anticipated. By historical standards, that's a pretty big revision. To some extent that’s not surprising, given that the last set of forecasts came amid the US banking crisis. Global interest rate expectations have since recovered, which mechanically pushes up Norges Bank’s forecast for its own policy rate. NOK was as much as 5.5% weaker at the end of May on a trade-weighted basis, relative to what the central bank had been assuming back in March, though that difference has narrowed over recent days. That weakness also requires higher rates, according to the bank's model.   Norges Bank has increased its interest rate projection – again   But the central bank also says that higher-than-expected inflation and wage growth will also force it to do more – and interestingly it’s this which accounts for most of the upward revision to interest rate projections this year, according to a chart in the Monetary Policy Report. The bottom line is that the central bank expects another 50bp of rate hikes from here, and whether we get that in one burst or two 25bp increments probably depends on whether the krone depreciates further from here. It’s worth noting that the new forecasts assume a gradual appreciation over the coming quarters. Either way, we suspect the newly-forecasted terminal rate of 4.25% will probably have been reached by the end of the third quarter. Further hikes over and above that can't be ruled out.     One more reason for NOK outperformance over SEK The blowout hawkish surprise by Norges Bank today – both in the magnitude of the hike and the rate projection revisions – puts NOK in a relatively strong position against other high-beta peers. That is because monetary policy divergence has become an increasingly more relevant driver for FX, and if indeed we see the Federal Reserve cycle coming to an end and FX volatility decline, the search for carry will reward currencies with more attractive implied rates.   Looking at EUR/NOK, it is still too early to call for a sustained downward trend, despite Norges Bank’s ultra-hawkish turn. That is because the ECB is keeping the euro idiosyncratically strong, NOK is still the least liquid G10 currency (so the most exposed to corrections in risk sentiment) and because Norges Bank has been less NOK-supportive on the FX purchase side (July announcement next week) than it has been on the monetary policy front.   We see NOK outperform SEK for now, considering the Riksbank should struggle to deliver a similar hawkish surprise given domestic economic woes. We might see a jump to 1.03 and even 1.04 in NOK/SEK in the near term, should the Riksbank fail to offer a floor to SEK. EUR/NOK remains, in our view, vulnerable to some upward corrections in the coming weeks, but if Norges Bank delivers on its plans to take rates to 4.25% (i.e. above our estimated ECB peak rate), then EUR/NOK can trade below 11.00 before the end of this year.
German Industrial Production Drops in May, Recession Risk Looms

FX Daily: Riksbank's Hike and Dollar Strength Amid Inflation Concerns

ING Economics ING Economics 29.06.2023 09:37
FX Daily: Riksbank needs to show the krona some love The central message coming from this week's Sintra conference is that economies are holding up better than expected, the decline in inflation has been frustratingly slow and more tightening needs to be done. Expect the dollar to stay bid ahead of what should be another high US core inflation print tomorrow. Elsewhere, the Riksbank is expected to hike 25bp.   USD: No reason to fight dollar strength this week Central bank communication at this week's Sintra conference in Portugal has stayed pretty hawkish. The core message seems to be that low unemployment rates have allowed economies to withstand large tightening cycles reasonably well, meaning that inflation has not fallen as much as expected. Expectations for the duration and terminal rates for tightening cycles are being revised higher. This is most credibly being done in the US, where the economy appears to be outperforming. This is allowing the dollar to stay quite bid - especially against those currencies without much/any interest rate difference such as the Japanese yen and the Chinese renminbi. On the latter, policymakers are gently trying to fight the steady move higher in USD/CNY by setting lower fixings. However, they may be forced to cut the required reserve on FX deposits as they did last September if they want to send a stronger message of displeasure over renminbi depreciation. And as we have seen over the years, a steady uptrend in USD/CNY is not conducive to an overall bear trend in the dollar. Back to the Fed. If central banks are increasingly data-dependent, what's next in store for the Fed? The most important data point of the week will be tomorrow's release of the core PCE deflator for May expected at 0.3/0.4% month-on-month. Presumably, investors will be a little long dollars going into that release. Before that, however, we today see the weekly initial jobless claims figures. These have recently settled at higher levels. Any big upside surprise here could knock the dollar intra-day on the view that tighter policy is finally easing up labour supply - a key shoe to drop in the fight against inflation.  DXY looks biased to 103.30/35 and possibly 103.65 - as long as initial claims do not spike higher today.
Asia's Economic Outlook: Bank of Korea Pauses, India and China Inflation Reports Awaited

SEK: Riksbank Walks a High Wire with Monetary Policy Decision

ING Economics ING Economics 29.06.2023 09:41
SEK: A high wire act for the Riksbank today EUR/SEK remains close to historic highs as the Riksbank prepares to announce a key monetary policy decision this morning. As discussed in our meeting preview, the performance of the krona is a primary source of concern for the Bank, but also a relatively “self-inflicted” pain. The dovish shift at the April meeting – when two Board members voted against a 50bp hike – left the krona unshielded from risk sentiment dynamics and above all, mounting domestic risks (particularly those related to a troubled property market). The key question today is whether the hawkish rhetoric that had supported the krona into April will somehow be rebuilt. Market pricing suggests a 50bp hike had been factored in the weeks leading to today’s announcement (a peak of 40bp was reached last week), and the OIS curve now prices 35bp for today and 46bp in total by the September meeting. We think that the recent financial turmoil hitting property company SBB and the more general fragile state of Sweden’s economy and property outlook would argue against a 50bp hike today, but we cannot fully rule it out. To prevent another SEK drop, a 25bp hike would need to be accompanied by signals in the rate forecasts and in the statement that the bank is ready to hike rates further. Another option – which has actually been hinted at by one of the dovish dissenters – would be to accelerate the pace of quantitative tightening. That should be a preferred solution to the third option - FX intervention – which may prove unsustainable and unsuccessful. We suspect there are limitations to the currency impact of faster QT, which would squeeze the back-end of the SEK curve but may leave the EUR-SEK short-term rate differential too wide (considering how hawkish the ECB is) unless the Riksbank pushes forward some rate hike pledges. Expect EUR/SEK volatility today: we suspect there are some upside risks and a move to the 11.85/11.90 level is possible as the Riksbank may fail to make a structurally SEK-bearish market change its mind. By contrast, should we see a resolutely hawkish tone, EUR/SEK may slide back below 11.70. As we have learned from the April meeting, the spectrum of surprises can be quite wide with the Riksbank.  
Euro Area PMI Readings Signal Economic Contraction. ECB's Tightening Monetary Policy Impacting Manufacturing and Services Sectors;

The Impact of Accelerated Quantitative Tightening on the Krona: Uncertainties Remain

ING Economics ING Economics 29.06.2023 10:55
Unclear what quicker quantitative tightening means for the krona EUR/SEK has been volatile in narrow ranges after the Riksbank’s announcement today. The positives for the krona are that today’s decision to hike was unanimous and that future rate hikes are promised. What is less certain is what today’s announcement of accelerated quantitative tightening (QT) means for the krona. Recall that back in February the Riksbank announced that it would be shrinking its holding of assets from around SEK800bn to SEK200bn over the next three years. In April, It started reducing its holdings of nominal and inflation-linked government bonds by SEK3.5bn per month. Today it has announced that the pace of sales will increase to SEK5bn per month starting in September. The Riksbank argues that its bond sales will raise yields on government bonds while having little impact on lending and deposit rates. It also argues that by supplying these government bonds back to the market, greater liquidity here will attract foreign investors and support the krona. The hypothesis of QT supporting the krona seems to be untested. So far this year, 10-year Swedish Government Bond (SGB) yields have only traded in a +/- 15bp range against 10-year German Bunds – and serves as a reminder that the ECB is also shrinking its balance sheet at the same time. In all, we suspect that EUR/SEK can stabilise around the current 11.70-11.80 levels. However, with the real estate market proving to be Sweden’s Achilles heel, we doubt that a sustained recovery in the undervalued krona will emerge until much later in the year when there are clearer signs of improvement in global inflation trends. Until that point, domestic risks in Sweden will continue to see the krona trade on a fragile footing.   Riksbank's initial planned sales of government bonds
Understanding the Factors Keeping Market Rates Under Upward Pressure

Swedish Krona's Plunge Amid Economic Challenges: Riksbank Rate Hike Expectations and Uncertain Future

Ed Moya Ed Moya 25.08.2023 09:39
Governor Thedeen say krona is fundamentally undervalued Markets fulling pricing in September Riksbank quarter-point rate hike Sweden’s government expects economy shrink by -0.8% in 2023 (previously eyed -0.4%) Sweden’s krona has been punished as the economy appears to be headed for a tough recession. Core inflation is coming down too slowly and that will keep the Riksbank hiking even as expectations grow for a lengthy recession.  The krona has not been getting any relief as many Swedes have started to embrace holding euros given the krona’s record plunge this year. Riksbank Governor Thedeen Riksbank governor Thedeen said that “the krona is too weak and it is fundamentally undervalued.” He added that “it should strengthen and we think that it will, but we know that it is almost impossible to predict currency moves over the short and medium term.” It is tough to call for a reversal after watching the krona fall to a fresh all-time low against the euro.  The current market expectations for the September meeting is to see the Riksbank raise rates by 25bps to 4.00%.  A freefalling krona is complicating the inflation fight, but that could see some relief as the outlook for the eurozone deteriorates. Expectations for the Sweden’s GDP are not seeing a strong consensus emerge.  Given the currency and inflation situation, it seems that the economy could be entering a recession that last more than a handful of quarters. The Swedish government is expecting a 0.8% decline in 2023 and a 1.0% growth for 2024.  It seems hard to believe that households will be a better position anytime soon, so a recession extending beyond 2024 seems likely.   The EUR/SEK weekly chart     EUR/SEK (weekly chart) as of Thursday (8/24/2023) shows the uptrend to record high territory is showing overbought conditions have arrived.  If the krona is able to firm up here, a mass exodus of EUR/SEK bullish bets could see price action tumble towards the 11.7118 region. If the plunge deeper into record low territory continues, EUR/SEK could make an attempt at the 12.000 which is just below the 141.% Fibonnaci expansion level of the 2020 high to 2021 low move. Last week, the krona was the most volatile G10 currency, so we should not be surprised if that volatility extends further given the chaos in the bond markets.    
Riksbank's Potential Rate Hike Amid Economic Challenges: Analysis and Outlook

Riksbank's Potential Rate Hike Amid Economic Challenges: Analysis and Outlook

ING Economics ING Economics 08.09.2023 10:37
Further declines in economic output are likely, but for now, the Riksbank is focused on high services inflation and renewed krona weakness.   Riksbank set for at least one more hike There are two weeks to go until the Riksbank’s September meeting and another 25bp rate hike looks pretty likely. Services inflation is uncomfortably high and the trade-weighted value of the krona is back to its lows. A follow-up rate hike in November can’t be ruled out. Yet the economy is clearly reacting to higher interest rates. A 0.8% decline in second quarter GDP, while not as bad as initially reported, shows the economy is under strain. On a year-on-year basis, Sweden is in the bottom five performers in the EU when it comes to growth. Still, the story isn’t universally bad and there are some bright spots. The jobs market is still very tight by historical standards, the housing market has stabilised, confidence is rebounding and consumer spending is showing signs of levelling out. Here, we look at how the economy is performing in several key areas. Housing market Housing is a well-known vulnerability for Sweden, and the 16% peak-to-trough fall in prices during 2022 was not hugely surprising. Compared to other European economies, Sweden has a much greater percentage of variable rate mortgages, and that proportion has only increased since interest rates started to rise. According to the Riksbank, 90% of loans have a remaining fixation period of below two years, and in the majority of cases, these are not fixed at all. The result is that the average rate on outstanding mortgages has increased by 200bp since the Covid low, compared to 64bp for the eurozone as a whole, and much less still in France/Germany. How average mortgage rates have changed since 2021 That said, housing prices have stabilised this year and household sentiment towards housing has improved noticeably. But the fundamentals of the market still look challenging, and data from Hemnet – a property search site – shows housing supply at multi-year highs, while separate figures show transactions are at a low. We tend to agree with the Riksbank’s forecast that further price falls are likely. Supply of housing has increased as transaction volumes fall   Jobs market Sweden’s unemployment rate is at a post-pandemic low, and that resilience has been helped by a pronounced reduction in joblessness among foreign-born workers. One of the key issues for a number of years has been a skills mismatch and poor integration of migrant workers into the Swedish jobs market – and the gulf between native unemployment (below 5%) and foreign-born workers (near 14%) is still large, but has narrowed. There are signs that the jobs market is cooling, however. The number of layoffs has started to rise, though from a low base. Vacancy numbers have been falling too, though so far the decline in the ratio of job openings to unemployment has been less sharp than in other economies, notably the US and UK. The proportion of service-sector businesses that see labour as a constraint on production has fallen from 45% to 30% in just over a year. Still, there are signs that firms are “hoarding” staff – i.e. they are afraid of letting people go given rehiring concerns. This is helped by the fact that nominal wage growth is relatively contained given the level of inflation, with the benchmark negotiated pay deal set at 3-4% for the next couple of years. That's noticeably below the rate we've been seeing in some other advanced economies. As a result, while we’re assuming that unemployment will increase over the coming months, the rise is likely to be gradual. Vacancy numbers are falling, albeit slowly Consumer spending Consumption has been falling consistently for a year now, though this masks big differences across spending categories. Furniture sales are down 15% on pre-pandemic levels while spending on recreation/culture is up by a similar percentage. Even in the weaker areas though, the story is stabilising. Consumer confidence has risen noticeably, and real wage growth is slowly becoming less negative. Still, with interest payments set to consume an ever-increasing share of household budgets, we don’t expect consumer spending to return to meaningful growth any time soon. Higher consumer confidence points to stabilisation in retail sales Production Like consumer spending, and like pretty much everywhere, Sweden’s manufacturing sector is also in contraction, at least according to the PMIs. Admittedly, this weakness hasn’t entirely been borne out in the official production data, and Swedish manufacturing has been operating 5-10% above pre-pandemic levels for much of the last year – in sharp contrast to the likes of France/Germany where production remains below early-2020 levels. This growth has been heavily concentrated though, primarily in chemicals/pharmaceutical products, and more recently in a sharp recovery in vehicle production. The latter is up almost a third since the start of 2022 on improved supply chains, but we suspect this is more of a catch-up story and can only last for so long. We expect the weaker manufacturing numbers to show up more clearly in the official data over the coming months. Bottom line Assuming there's a renewed fall in house prices, some gradual weakness in the jobs market and ongoing pressure on consumer spending and production, we're likely to see further declines in economic output through the remainder of this year. While the Riksbank clearly isn't quite done with rate hikes, the fragile economic backdrop suggests we're near the peak.
Riksbank's Role in Shaping the Swedish Krona's Future Amid Economic Challenges

Riksbank's Role in Shaping the Swedish Krona's Future Amid Economic Challenges

ING Economics ING Economics 08.09.2023 10:48
Swedish krona still searching for the bottom, but the Riksbank can help EUR/SEK is close to the 12.00 level, trading at historic highs as external and domestic factors have added pressure to the already weak krona. In the medium term, we have few doubts SEK can recover and converge with higher fair value, but the timing is highly uncertain, and will be more dependent on the global market environment than on Sweden’s economic woes.   Why it’s still hard to pick the bottom for the krona Back in May, we published a note entitled “Sweden: Hard to pick a bottom for the unloved krona”. More than three months later, it is still hard to pinpoint an end to the EUR/SEK rally, and the key drivers behind the strength in the pair have not changed materially. Back then, the Riksbank had just lifted the cap on the pair with a dovish surprise, and while it later attempted to restore a currency-supportive hawkish stance, markets have continued to price a good deal of domestic downside risk into SEK. In the broader FX picture, pro-cyclical currencies like SEK are primarily responding to US data at the current juncture: the recent resilience in activity indicators has kept market expectations for Fed easing capped, global rates elevated, the dollar strong and high-beta currencies under pressure. Remember how NOK and SEK emerged as the two biggest underperformers during the core of the Fed tightening cycle? As the higher-for-longer narrative in the US consolidates, investors are once again turning their backs on the illiquid Scandinavian currencies. And with Sweden facing domestic headwinds and the eurozone’s economic outlook deteriorating, EUR/SEK is trading at fresh highs, and at risk of touching the 12.00 pain level.         The Riksbank can cap krona weakness The chart below shows the risk premium (orange line) that has been built in for the krona (against the euro) since the start of the year. That tells us how much higher EUR/SEK is trading compared to what we estimate is its fair value according to market drivers (like rates and equities).       Despite perceived real estate concerns building steadily into the end of April, EUR/SEK traded close to its fair value thanks to the Riksbank’s currency-supportive hawkish tone. The shift in narrative at the April meeting (when two members voted against a 50bp hike, and the rate path was more dovish than expected) led to a spike in SEK undervaluation, which lasted for two months. Crucially, the return of a currency-supportive hawkish stance at the Riksbank’s June meeting saw the EUR/SEK mis-valuation drop to zero. The following build-up in the EUR/SEK risk premium was much more short-lived compared to the one in May-June, and primarily a consequence of the bond sell-off in the US.   So, what is this telling us? The Riksbank can still impact the krona substantially. Despite not being able to fully insulate a high-beta currency like SEK from external drivers, it can prevent it from trading below its short-term fair value. To do this, it must meet or exceed market expectations on future rate tightening (i.e. via rate path projections), which has the additional benefit of signalling that the Bank is not so worried about the economic outlook and the risks to financial stability as to overlook its inflation mandate and the need to stabilise the currency. Markets are fully pricing in a 25bp hike in September, with a 50% implied probability of another 25bp hike at the November meeting. The Riksbank will likely have to signal one more hike in its rate path projections to support the krona when it raises rates in September. Our SEK forecast: the question is timing, not direction One aspect of the lingering SEK risk premium is that it has detached from short-term rate dynamics, which had been a key driver until April/May last year. Based on the EUR:SEK two-year swap spread alone, EUR/SEK should be trading around 11.00 (chart below). In the current market conditions that is, obviously, inconceivable.     We continue to base our medium-term forecast on the evidence that the krona is significantly undervalued, both against the euro and the dollar. On the back of this, our forecast profile for EUR/SEK is downward-sloping for 2024, and we expect the pair to trade below 11.00 by next summer. We must admit, however, that the timing of the SEK recovery remains quite uncertain. In our view, this is not excessively dependent on domestic factors; the krona is already pricing in a sizeable amount of weakness in the domestic economy, and markets will either see the most dramatic scenarios for the real estate sector materialise (not our base case) or will have to price them out of the krona next year. Missteps by the Riksbank, if anything, have a higher chance of causing FX damage.   External drivers hold the key to the recovery We think, instead, that SEK’s reconnection with its stronger fundamentals will be driven by the global FX narrative. A strong dollar on the back of higher-for-longer rates in the US is incompatible with a recovery in the krona. The past few months have been a clear testament to this. We expect US activity data to start turning from 4Q23, and the Federal Reserve to start cutting from March 2024, and that is the window when pro-cyclical currencies like SEK can stage a good rebound. However, we admit that the resilience in US economic data could persist for longer than we estimate, and delay as well as reduce the scope of the recovery in pro-cyclical currencies. A further deterioration in the eurozone growth outlook can also make the krona’s recovery harder.   Until a US data/dollar turn occurs, the krona will remain vulnerable, and we only see 12.00 as the really strong resistance level for EUR/SEK. So far, the Riksbank has ruled out FX intervention but might start throwing that idea around to gauge market reaction (the effective applicability remains doubtful) should we break above the 12.00 mark. We see room for a SEK rebound around the Riksbank’s upcoming meeting when we expect the SEK-supportive narrative to prevail and a good chance of another hike to be added to the rate path. EUR/SEK could be easing back to 11.70 by the end of September.
Market Focus: Economic Data and Central Banks' Policies

Market Focus: Economic Data and Central Banks' Policies

FXMAG Team FXMAG Team 14.09.2023 08:58
EGB curves bear-flattened yesterday, with investors adjusting their positions ahead of upcoming macro events. Gilts were the stars of the day, with their yields declining after July jobs data confirmed a softening of the labor market, while USTs were little changed. European stocks edged moderately lower. Brent rose by 1.5% to USD 92/bbl   Caution has prevailed overnight, as highlighted by the weak performance of Asian stocks as well as US and European stock futures. While USTs are little changed, Bund futures have edged lower following a Reuters report that the ECB might raise its inflation projection for next year to above 3%. EGBs are set to open the trading session under pressure. In FX, EUR-USD has risen towards the 1.0750 area and USD-JPY has reached 147.40. EGB issuance activity will be quite lively today, with Italy, Germany and Portugal selling a total of EUR 13bn. Focus will be on the new 7Y BTP, the fourth and last new benchmark to be issued by Italy in 3Q23. With respect to the macro data, investor focus will be on US CPI data. The inflation report precedes the FOMC meeting by a week and will probably affect the Fed’s decision and, to a lesser extent, the updated economic projections that will be published next Wednesday. August CPI data are expected to show a mixed picture, with headline inflation likely having increased due to higher energy prices (in August, the average oil price was 6% higher than in July), while core inflation probably softened further. If data come in line with our estimates and consensus, the impact on fixed-income securities will probably be negligible as there seems to be consensus among analysts. Although market-based inflation expectations have already risen due to higher energy prices, especially at shorter tenors, their increase has been limited and breakeven rates have remained within the trading ranges of the last three months. Since 10 August, when July CPI data were published, the 10Y UST yield has risen by 20bp, with the real yield component, now close to 2%, contributing almost 100%. This move shows that inflation expectations remain anchored and that the re-acceleration of headline inflation in August is not seen as a major concern for investors or the Fed. On the other hand, the fresh increase in real yields seems to suggest that investors are continuing to reduce their expectations of a recession in the US and a rapid shift towards a looser monetary policy by the Fed. We see credit starting on a more cautious tone today ahead of the release of US CPI data in the afternoon and higher oil prices are weighing on equity markets. The sentiment on the Swedish residential property market declined again in September with more respondents in the monthly SBAB house price survey now seeing prices falling. The market expectation of a further rate hike by the Swedish central bank indicates expectations that further rising borrowing costs and inflation will lead to accommodation becoming less affordable. Swedish residential property prices are around 10% below their peak in March 2022 and market commentators see overall price declines of 20% as possible. For Swedish banks we see a further decline as still manageable given that average LTVs are in the 50-60% rang   Today and tomorrow are set to be two crucial days for the FX market US CPI inflation for August is the key release early this afternoon, but the USD reaction might prove to be complicated. This is because the US data will likely be mixed. We expect a rise in the headline index and a further decline in the core rate. This might spark some USD swings when the data are published but FX majors will probably end today’s session not far from current levels, given the ECB decision tomorrow. For there to be a more directional reaction, both headline and core inflation would have to surprise to the upside or the downside. Since a steady FOMC meeting outcome on 20 September is highly likely at this point, we expect the market reaction to be asymmetric and think that softer-than-expected data (even in the headline component) are unlikely to dent the current USD strength too much. On the other hand, an unexpected and sharp acceleration in the core index is probably needed to force investors to return to pricing in a higher chance of another rate hike in the US next week, which would drive the dollar index (DXY) back towards the recent peak of 105.15. In our view, EUR-USD is set to remain close to 1.0750, after press report suggesting that the ECB expects inflation to remain above 3% next year. Recent lows of around 1.0690 and 1.0770-1.08 are thus the key levels to monitor. Meanwhile, bad economic data in the UK early this morning will likely keep GBP-USD below 1.25. The return of USDJPY to 147 makes it clear that the debate on policy normalization in Japan is not enough to convince investors to ride a yen recovery, while USD-CNY and USD-CNH are likely to remain below 7.30 amid higher funding costs in the offshore market. Early tomorrow morning the decline that we expect in both headline and core inflation data in Sweden is unlikely to prevent another 25bp rate hike by the Riksbank next week. Still, the data will probably weigh somewhat on the SEK at the start of the European session. The PLN looks set to continue to suffer from the NBP’s bold rate cut last week. The HUF will likely trade close to 385 against the EUR after Hungarian Economic Development Minister Nagy hinted at stagnant growth for Hungary this year, while the NBH confirmed that the base rate (now 13%) will replace the 1D depo rate (now 14%) from 1 October. Lastly, the RUB steadying around 95 against the USD further suggests a steady outcome to the CBR meeting on Friday.
SEK Faces Risks as Disinflation Accelerates Ahead of Riksbank Meeting

SEK Faces Risks as Disinflation Accelerates Ahead of Riksbank Meeting

ING Economics ING Economics 14.09.2023 10:48
SEK: Faster disinflation poses FX risks ahead of Riksbank meeting Swedish inflation figures for August showed a faster-than-expected decline this morning. Despite consensus already anticipating CPIF inflation would slow sharply from 6.4% to 4.9%, the August print came in at 4.7%. The core rate (CPIF excluding energy), which is closely watched by the Riksbank, was 7.2%, down from 8.0% in July. EUR/SEK is not hugely changed after the release, but is feeling some upward pressure again and re-testing the 11.9620 21 August highs. However, the downside risks for the krona of this faster-than-expected disinflation (first negative month-on-month core reading since December 2021) might be greater than what we can observe in the immediate FX reaction. We’ll need to wait for the Prospera inflation expectation survey tomorrow, which is a key input for Riksbank’s policy decisions, but there is a higher risk that if the Riksbank hikes, some doves may voice their dissent as they did back in April. On that occasion, the implications for SEK were disastrous. With SEK trading at historical lows, we are more inclined to think Riksbank members will show a united front and preserve currency stability. That would require not just a hike, but also signalling another one in rate projections, as discussed in our latest note on this topic. We are slightly less convinced the Riksbank can convey this hawkish message next week after these inflation figures, but it remains our base case. If the ECB hikes today, risk sentiment remains unfavourable and the Fed is hawkish next week, EUR/SEK may well be hitting 12.00 before the Riksbank meeting: another incentive to be hawkish for Swedish policymakers.
EUR/USD Faces Pressure Amid PMI Releases: Is More Downside Ahead?

EUR/USD Faces Pressure Amid PMI Releases: Is More Downside Ahead?

ING Economics ING Economics 25.09.2023 11:08
EUR: More pain from the PMIs? EUR/USD remains under pressure as dollar strength dominates. The euro faces an event risk from today's releases of the flash PMIs for September. It really has been the PMI releases that have hit the euro since the summer. Despite all this pessimism about the euro, however, the ECB's trade-weighted euro is only 2% off its highs in July. This can probably be read as both the strong dollar being the dominant story and the eurozone's trading partners (Europe and China) faring as poorly as the eurozone. For EUR/USD, an imminent turnaround looks unlikely and support at 1.0600/0610 looks the last barrier before what seems the more likely dip to the 1.05 area. As discussed in the Swiss National Bank (SNB) review, the dovish turn from the SNB did not do too much damage to the Swiss franc since the SNB is still selling FX. Expect EUR/CHF to get back to 0.95 over the coming months. Chris Turner Elsewhere, both the Riksbank and Norges Bank hiked by 25bp yesterday, in line with expectations. The Riksbank signalled close to a 50% implied probability of another hike in its rate projections, matching market pricing. The Governor said there is a high probability of more hikes, but there seems to be low conviction within the Board. As discussed in our meeting review, this was a missed opportunity for policymakers to deliver real support to the krona, which averted a slump only thanks to the announcement that FX reserves will be hedged. Please see the background on that topic here. SEK remains vulnerable in the near term, and EUR/SEK can break the 12.00 ceiling soon. Norges Bank was more hawkish, as it explicitly signalled another hike should be delivered in December, although that should be the last one. EUR/NOK was only modestly offered and remains tied to the 11.50 level: a confirmation that a NOK rebound (or further depreciation) relies almost entirely on external factors. Francesco Pesole
The Eurozone's Trade Woes and Their Impact on EUR/USD

The Eurozone's Trade Woes and Their Impact on EUR/USD

ING Economics ING Economics 26.09.2023 14:49
EUR: Falling world trade does not help Not helping the euro has been data released showing that world merchandise trade volumes fell another 0.6% month-on-month in July. As a relatively open economy, the eurozone suffers from a declining trade environment, as does the euro. Our banking analysts have also written that the ECB is considering raising the Minimum Reserve Requirement for the banks that it supervises. This would tighten conditions still further and add more growth pessimism in the euro area. The Eurostoxx 50 index is now down nearly 8% from its highs at the start of August. EUR/USD remains soft having broken below support at 1.0600/0610. Without support from extreme under-valuation or existing heavy short positioning, EUR/USD looks as though it could sink into the 1.0480/1.0510 support area. Elsewhere, the Swedish krona is performing surprisingly well given this high interest rate environment. Unlike the euro, the krona is backed by extreme fundamental under-valuation. Additionally, news that the troubled Swedish property developer, SBB, has secured liquidity by selling some of its property portfolio alleviates some fears of a funding crisis. And the market will no doubt be speculating that the Riksbank has started hedging its FX reserve portfolio, as promised last week. While tough external conditions hardly make it the occasion to chase EUR/SEK lower, the factors above could mean NOK/SEK drops back to the 1.01 area.
Global Markets Shaken as Yields Soar: Dollar Surges, Stocks Slump, and Gold Holds Ground Amid Debt Concerns and Rate Hike Expectations

Global Markets Shaken as Yields Soar: Dollar Surges, Stocks Slump, and Gold Holds Ground Amid Debt Concerns and Rate Hike Expectations

Saxo Bank Saxo Bank 26.09.2023 15:25
Asian stocks fell with US futures as yields on 10-year Treasuries reach a 16-year high above 4.54% while China Evergrande Group missed a debt payment adding to fears about the sectors massive debt pile. Broad dollar strength continues with the greenback trading at its highest level since December as another Fed member said another rate hike this year will be needed. Crude oil trades softer amid macroeconomic concerns and a stretched speculative long while gold holds support despite multiple headwinds. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events. Equities: S&P 500 futures are under pressure this morning with the US 10-year yield hitting 4.55% extending its relentless move higher. If the US 10-year yield moves to 4.75% we will most likely begin seeing widening cracks in equities as the prevailing narrative of falling inflation collapses. Yesterday’s session saw no meaningful rotation between defensive and cyclical sectors. Today’s key events are US consumer confidence figures and Costco earnings tonight after the market close. FX: Higher Treasury yields, particularly in the long end, pushed the dollar higher to extend its gains. USDCHF rose to near 4-month highs of 0.9136 with immediate target at 0.9162 which is 0.382 retracement level. EURUSD broke below 1.06 support despite better-than-expected German Ifo. USDJPY attempted a move towards 149 with verbal intervention remaining lacklustre. AUD slipped on China woes while NZD and CAD were relative gainers, and the outperformer was SEK with the Riksbank starting its FX hedging today. Commodities: Crude trades lower for a second day with macroeconomic concerns, a stronger dollar and a stretched speculative long and easing refinery margin weighing on prices. Gold prices continue to defy gravity, holding above $1900 support with demand for stagflation protection offsetting the current yield and dollar surge. LME copper is trading at the widest contango (oversupply) since at least 1994 as inventories expand and China demand concerns persist. Wheat continues to face downward pressure from huge Russian harvest despite weather related downgrades in Australia. Fixed Income. The Federal Reserve’s higher-for-longer message reverberates through higher long-term US Treasury yields. Unless there is a sign that the job market is weakening significantly or that the economy is slowing down quickly, long-term yields will continue to soar. With 10-year yields breaking above 4.5% and selling pressure continuing to mount through an increase in coupon supply, quantitative tightening, and waning foreign investors demand, it’s likely to see yields continue to rise until something breaks. This week, our attention turns to US PCE numbers and Europe CPI data while the US Treasury will sell 2-, 5- and 7-year notes. It will be interesting to see if investors buy the belly of the yield curve as a sign that they are preparing for a bull rather than a bear-steepening. Overall, we continue to favour short-term maturities and quality. Volatility: VIX Index still sits at around the 17 level, but the downward pressure in equity futures this morning could push the VIX much higher. This could be a cycle where the market tests the 20 level. Macro: Fed’s Goolsbee (voter) kept the door open for more rate hikes while emphasizing higher-for-longer. Moody’s warned of a protracted government shutdown saying that it could weigh on consumer confidence and markets. Meanwhile, after PMIs, Germany’s Ifo also showed a slight improvement in business outlook to 85.7 vs. 85.2 expected, while the previous was revised higher to 85.8. There were several ECB speakers once again. Lagarde largely repeated what was said at the ECB Press Conference, noting policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target. Schnabel said there is not yet an all-clear for the inflation problem. In the news: Interest rates will stay high 'as long as necessary,' the European Central Bank's leader says (Quartz), Teetering China Property Giants Undercut Xi’s Revival Push (Bloomberg), Russia dodges G7 price cap sanctions on most of its oil exports (FT), Global trade falls at fastest pace since pandemic (FT), Dimon Warns World Not Ready for 7% Fed Rate: Times of India via Bloomberg Technical analysis: S&P500 downtrend support at 4,328 & 4,200. Nasdaq 100 support at 14,687 &14,254. DAX downtrend support at 14,933. EURUSD below strong support, resuming downtrend to 1.05. GBPUSD downtrend strong support at 1.2175. Gold rangebound 1,900-1,950. Crude oil correction: WTI expect to 87.58. Brent to 80.62. US 10-year T-yields 4.55, uptrend but expect minor correction Macro events: US New Home Sales (Aug) exp 699k vs 714k prior (1400 GMT), US Consumer Confidence (Sep) exp 105.5 vs 106.1 prior. Speeches from Fed’s Bowman (voter) as well as ECB’s Lane, Simkus and Muller. Earnings events: Costco reports FY23 Q4 earnings (aft-mkt) today with estimated revenue growth of 8% y/y and EPS growth of 14% y/y. H&M reports FY23 Q3 earnings (bef-mkt) with estimated revenue growth of 7% y/y and EPS growth of 47% y/y. Micron Technology reports FY23 Q4 earnings (aft-mkt) with estimated revenue growth of -41% y/y and EPS of $-1.18 vs $1.37 a year ago. Accenture reports FY23 Q4 earnings (bef-mkt) with estimated revenue growth of 4% y/y and EPS unchanged from a year ago. Nike reports FY24 Q1 earnings (aft-mkt) with estimated revenue growth of 3% y/y and EPS growth of –20% y/y.
SEK: Riksbank's Impact on the Krona

SEK: Riksbank's Impact on the Krona

ING Economics ING Economics 27.09.2023 12:55
SEK: Riksbank propping krona ? The Swedish krona has been a big outlier since the start of the week, strengthening for two consecutive sessions while all other G10 currencies fell against the dollar. While the positive developments on the SBB saga have likely helped compress the EUR/SEK risk premium, that seems insufficient to justify such outperformance, especially considering the krona’s high beta to risk sentiment, which has been soft. It appears instead that the Riksbank’s start of hedging operations is having a substantial impact on the market. For context, the Riksbank announced last Thursday that it would hedge part (USD 8 billion and EUR 2 billion) of its FX reserves in a risk-management move aimed at reducing losses in the event of a krona appreciation. Unlike other measures of this kind, the Bank did not release a schedule for purchases but only said that the operations would take four to six months, the sales “will be adjusted to market conditions to avoid counteracting the Riksbank's objectives” and weekly sales data will be published with a two-week delay. We saw two sharp drops in USD/SEK and EUR/SEK in the past two sessions shortly after 1000 BST in Monday’s and Tuesday’s session. We’ll be on the lookout today for a similar move around that time today, as that may be a signal that the Riksbank is conducting its daily sales operations around that morning timeslot. The Riksbank stressed this is not FX intervention or a monetary policy tool but mere risk management. The lack of transparency around the amount of weekly sales means the Bank can sell larger amounts at higher USD/SEK and EUR/SEK levels and then justify this as a mere loss-minimisation approach (buying more SEK when it is cheaper). For now, it seems like the wanted or unwanted beneficiary effect on SEK is working. We still point at some upside risks in the near term for USD/SEK and EUR/SEK, especially once markets adjust to the Riksbank being present in the FX market, although now there is definitely value in holding SEK against other high beta pro-cyclical currencies like NOK.
The EIA Reports Tight Crude Oil Market: Prices Firm on Positive Inventory Data and Middle East Tensions

Market Skepticism Prevails as EUR/USD Struggles Amidst ECB's Hike Uncertainty

ING Economics ING Economics 03.11.2023 14:53
EUR: The market has closed the door on further ECB hikes Overnight, the European Central Bank's Isabel Schnabel said the ECB cannot close the door on further rate hikes, citing fragile inflation expectations and the risk of more geo-political supply shocks. However, the market has priced out any further rate hikes and is firmly looking at the 2024 easing cycle. This means that despite lower US rates recently, two-year EUR:USD swap differentials have not narrowed meaningfully and probably explains why EUR/USD is struggling to take advantage of the softer dollar environment.  For reference, EUR/AUD has fallen 1% this week and macro traders will be looking for a big move lower here when they become confident of bullish steepening in the US curve. Given global conditions, however, we would favour EUR/USD towards the 1.0675/1.0700 today area unless US jobs surprise on the upside. Chris Turner In Sweden, the Riksbank will release FX hedging figures for the week 16-20 October this morning. FX sales numbers have been quite volatile and declined sharply from nearly USD 1bn to around USD 450mn total in last Friday’s report. We expect another uptick in FX sales today on the back of SEK underperformance in the week 16-20 October, which we think pushed the Riksbank to increase interventionism in the FX market. High FX sales are a SEK negative, and can favour another leg higher in EUR/SEK: we now see risks skewed to 11.85-11.90 in the near term.
Rates Spark: Time to Fade the Up-Move in Yields

SEK: Riksbank's Dilemma - To Hike or to Hold in a Precarious Balancing Act

ING Economics ING Economics 23.11.2023 13:19
SEK: Riksbank at a crossroads Today’s Riksbank rate announcement is as close to a 50/50 hike/hold decision as it can get. The Bank has been hugely focused on the krona’s levels recently, and the recent good performance of SEK has prompted markets to lean on the dovish side (70% implied probability of a hold). One major counterargument is that the recent SEK strength has been somewhat “artificial”, given it has been driven by some rather aggressive FX selling via hedging operations by the Riksbank itself. On the inflation side, core and headline price pressures have abated faster than expected, although the CPIF excluding energy is still at 6.1% YoY, and the Prospera surveys suggested inflation expectations have remained quite sticky. What we see as a major point in favour of a hike is timing. The Riksbank’s next policy meeting is in February, when the economic slack will have likely materialised more clearly in Sweden and abroad and it will be considerably harder to hike rates. If the intent is to provide more support to SEK, the Riksbank may take into account that FX sales (i.e. the “artificial” support to SEK) should terminate around the end of January/early February if the current weekly pace is sustained, and be encouraged to hike now rather than later, when economic conditions likely won’t allow it. All in all, we are slightly leaning in favour of a rate hike today, even though we admit it is a very close call. A hold may be accompanied by an acceleration in quantitative tightening. The FX impact won’t just depend on the outcome, since there is a tangible risk of a split board, which could limit the upside potential for SEK in the event of a hike.
Unraveling the Dollar Rally: Assessing the Factors Behind the Surprising Rebound and Market Dynamics

EUR/USD Faces Setback as ECB Doves Signal End of Tightening Cycle

ING Economics ING Economics 04.12.2023 14:10
EUR: ECB doves are landing punches EUR/USD suffered quite a sharp setback on Friday after Bank of France Governor, Francois Villeroy de Galhau, said that barring shocks, the ECB tightening cycle was over and that the ECB would consider the question of easing in 2024. Money markets price the first full ECB cut by next April - marginally earlier than the Fed. This was always the risk that the ECB would be cutting at a similar magnitude to the Fed in 2024 - meaning that EUR/USD did not need to rally much. That is why our EUR/USD quarterly profile in 2024 is still quite modest - 1.10 for 2Q24, 1.15 for 4Q24 and why we have favoured short positions in cross rates like EUR/AUD - which has fallen 2.5% over the last couple of weeks. This week sees some second-tier eurozone data (Sentix, retail sales, final 3Q23 GDP revisions) but also ECB speakers including President Christine Lagarde at 15CET today.  She will probably try to keep the peace between the hawks and the doves by suggesting a further rate hike is still on the table.  1.0825 now looks good intra-day support for EUR/USD. We suspect that it would have to take a very strong payrolls report to see EUR/USD trade 1.0700 again. But then the euro can remain soft on the crosses for the time being. Also today, look out for some updates on Riksbank thinking; the minutes of its November meeting are released at 0930CET. We described this meeting as a hawkish hold.  This is followed by a speech from Riksbank's Anna Breman at 11CET.
The EIA Reports Tight Crude Oil Market: Prices Firm on Positive Inventory Data and Middle East Tensions

EUR: Lagarde's Potential Hawkish Shift in Davos Amidst Market Skepticism

ING Economics ING Economics 16.01.2024 12:20
EUR: Lagarde may sound more hawkish in Davos The data inputs for EUR/USD will mostly come from Germany this week, with 2023 GDP figures today and the ZEW survey tomorrow along with final CPI numbers. We have often discussed how European Central Bank rate cut expectations appear way too aggressive (150bp by year-end), although the dovish members of the bank have failed to deliver a coordinated pushback. Despite ECB hawks' protests against dovish expectations having had little impact on the market, the WEF event in Davos this week – which sees many ECB speakers including President Christine Lagarde – should not be overlooked. Lagarde has a greater potential to influence markets given a clearly divided Governing Council, and we suspect that she will opt for a more hawkish tone compared to last week’s comments. There may be some help for the euro coming from Davos, although we should be wary. Fed expectations have been resistant to data and the same could hold true for the ECB as well. The minutes from the December policy meeting are also released this week. We still think it is premature for EUR/USD to trade sustainably above 1.10. Elsewhere, Sweden published inflation figures today. CPIF declined to 2.3% from 3.6% (consensus 2.2%), although the core measure excluding energy remained high, slowing from 5.4% to 5.3% versus a consensus of 5.2%. Despite this, it remains unlikely that the Riksbank will tighten policy again. If anything, this modestly raises the chances that another round of FX sales will be started after the current reserve hedging programme ends in early February (in our view).

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