Riksbank minutes supports our call for further easing

We have seen some support to the Swedish krona this morning after Robur Swedbank’s asset manager accepted the VW bid for Scania. Last night the second AP (state pension) fund also accepted the bid. The VW bid for Scania expires tomorrow and VW needs a 90 % acceptance rate. For more see this Bloomberg article.

The Riksbank Minutes from the April 8 meeting was published this morning. Minutes confirmed that many members in the majority camp were close to vote for a cut given the low rate of inflation. Especially, we note this comment from Mr. Jansson, “the decision on this occasion was to a large degree about whether the revisions to the inflation forecast were sufficient to justify an immediate cut in the repo rate. After much consideration, he had decided that they were not“. Hence, it seems quite fair to assume that Jansson would have voted for a rate cut had he known the very low inflation numbers for March that were published just two days after the meeting. Hence, all in all we consider Minutes to be on the dovish side and should be supportive for EUR/SEK and our view that the Riksbank will cut at the July meeting. But note that the latest development in the VW bid for Scania works in the other direction. However, when we are past this flow the SEK will still be exposed to a central bank that is very close to cutting rates. Currently, the market is pricing 17bps for a cut at the July meeting. We believe that should be higher. Our short-term financial model for EUR/SEK has currently a fair-value of 9.093.

Recently, we have had some EUR supportive news. ECB’s Nowotny downplayed expectations about more stimulus in May as he said that the ECB will only be able to really judge in June whether the trend of low inflation is strengthening. Some ECB members have hinted at this before but the increase in euro PMIs yesterday implies we see a lower likelihood of more easing in May. In our view inflation has to surprise on the downside and stay very low in April for the ECB to ease in May. Also the flow into peripheral bond markets continue at a steady pace. Yesterday Portugal held its first regular government bond auction since applying for international help in 2011. The auction of the 10Y bond resulted in a better-than-expected yield of 3.57% and it looks like Portugal will make a clean exit from the Troika programme during the summer. All in all the verdict is still out whether the ECB will ease further and EUR/USD continues to trade in a very tight range around 1.38 and implied option volatility continues to edge lower. 3M implied volatility has not been this low since 2007 (see slide 2). The continued drop in volatility has continued despite the uncertainty regarding future monetary policy in both the US and the euro-area and the ongoing jitters in Ukraine.