Scandi figures in focus this morning

Swedish retail sales figures released today are likely to confirm that domestic demand remains fairly strong. Viewed in isolation, this should be SEK positive. However, the market has already tuned in on next week’s interest rate meeting at the Riksbank and while a 25bp rate cut is widely expected and already fully priced in to the market, the big question will be how much the Riksbank will lower its rate path. In Reading the Markets Sweden (26 June), our rate strategists argue that the Riksbank is likely to deliver something close to the current market pricing of the Swedish money market, suggesting that risk/reward may be viewed as fairly neutral although pricing looks a bit stretched. In order for the market reaction to be neutral, the Riksbank probably needs to fulfill the following requirements: 1) the Riksbank cuts 25bp, 2) from that level a reasonably strong likelihood of a further cut in the next few quarters is indicated, 3) the timing of the first rate hike is pushed out another quarter or two and 4) a reduction of the repo rate path for the final few quarters, i.e. 2016 and 2017 by some 50bp.

From an FX perspective, our short-term financial model currently indicates that EUR/SEK is slightly overbought – trading 1 standard deviation above its fair value of 9.066. Hence, our short-term model cannot fully explain the move higher in EUR/SEK despite a decline in Swedish interest rates which implies that risk might be slightly tilted to the downside in EUR/SEK. However, given the unexpected dovish stance from Norges Bank last week, and the risk that the Riksbank actually might exceed that, we prefer to stay sidelined in EUR/SEK ahead of the Riksbank meeting next week.

In Norway, the unemployment figures are likely to indicate that the labour market is stabilising, suggesting that growth is more or less on trend. This should be positive for the NOK as downside risk is reduced.