EUR/SEK to retest 10 – RBC CM

Adam Cole, Research Analyst at RBC Capital Markets explains that the EUR/SEK sell off in late-2016 extended through January, taking the pair as low as 9.40 and February has seen a sharp reversal, however, and EUR/SEK now appears to be settling into an uptrend again and may retest 10 levels again.

Key Quotes

“We have little in the way of hard data on positioning for SEK, though we strongly suspect that long SEK is both a strong consensus view and, after the November to January price action, an overcrowded trade. Consensus forecasts have SEK by far the best-performing currency over the next 12 months (up 9% against USD; NOK is the only other G10 currency that is materially positive at 7%). On the face of it, it is easy to see why analysts are so bullish. Swedish GDP growth, at 2.3% y/y in Q4, is amongst the strongest in G10 and at 1.0% q/q quarterly growth was the strongest for a year. Underlying inflation continues to trend higher and market-based measures of expectations are at a five year high.”

“Against this positive growth and inflation background, the stance of domestic policy is extremely loose – looser than any other G10 economy relative to simple Taylor Rule neutral rates. So the case for eventual normalisation is very strong. We see two flies in the bullish SEK ointment. The first is that the Riksbank shows no sign of responding to improving domestic data. At its February 15 policy announcement, it maintained an easing bias, forecasting average repo rates below the current -0.5% until mid-2018. In contrast, RIBA futures already price in a material risk of higher rates on the same time horizon. Secondly, SEK remains blighted by its status as an efficient funding currency for G10 carry trades and the ongoing attractiveness of carry as investment strategy.”

“We would also note that most of the positive dynamic factors noted above held in 2016, when SEK was the second worst-performer in G10. We retain an off-consensus bearish view on SEK, though we have pushed the EUR/SEK target peak (10.00) to Q2 from Q1.”