• FxWirePro: does Riksbank follow ecb’s footsteps, call switches in eur/usd/pln and option triangle in eur/nok/sek

    Source: FxWire Pro - Central Bank / 05 Jul 2017 09:17:02   Eastern Standard Time

    We maintain our forecast for a modest and gradual appreciation in SEK which has been predicated on a strong economy leading to a slow reversal in monetary policy. Year-end Forecast for EURSEK is at 9.45 and 1H’18 at 9.30 (both unchanged).

    SEK continues to screen cheap on multiple metrics. It currently appears 2.5% or 1.7 sigma too cheap vs EUR adjusted for rates and balance sheet differentials (refer above chart). SEK also looks modestly cheap on long-term value metrics as well with REER 7% below 15y averages.

    However, an offset comes in the form of negative carry, which is among the most negative globally (refer above chart). The bias is maintained negative given the combination of a dovish Riksbank and poor carry.

    For now, the interesting question is, will Riksbank follow the current trend amongst G10 central banks and also signal and end of its expansionary monetary policy? It would have good reason to do so. The economy has been recording decent growth for some years now. And the inflation trend is quite encouraging too these days.

    Admittedly, in April Riksbank had surprised us on the dovish side when it extended its asset purchasing programme by another 6 months until year-end, but this has to be seen mainly in reaction to the ECB and its still cautious approach at the time. By doing that, Riksbank demonstrated that it does not want to endanger the economic and inflation recovery due to excessive SEK appreciation against the EUR.

    However, much has happened since then. The economic recovery in the eurozone has strengthened and thanks to the prospect of an imminent exit from the ECB’s expansionary monetary policy, EUR has appreciated. That offers Riksbank the opportunity to break the news of its asset purchasing programme coming to an end to the market cautiously – i.e. without it causing excessive SEK appreciation.

    At the same time, Draghi underlined also that the ECB had to be very prudent and that the exit from the expansionary monetary policy would have to be very slow. A reference to the forward guidance was also included. Draghi’s speech provided wings to the euro, by now EURUSD is trading above 1.1350.

    EUR-cross vols should be more muted in H2 as data momentum and investor focus on Europe cools.

    Buy 2M 25D EUR call switches in EURUSD vs EURPLN and sell EURNOK – EURSEK correlations via a vanilla option triangle.