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Scandi trade: Pay 2y2y NOK and receive 2y2y SEK
Mon, Jul 28 2008, 14:25 GMT
by Arne Lohmann Rasmussen
Over the last two months we have witnessed a tightening in the swap spreads between Norway and Sweden. The main culprit has been the aggressive message from the Swedish Riksbank that further rate hikes are in the pipeline due to the elevated high headline inflation, whereas Norges Bank has been more pragmatic in its approach, stressing both the inflation risks but also the negative impact from the global economy.
Our base case is that the Riksbank is overestimating headline inflation over the medium-term. That said, it is worth noting that oil is the single most important price component that could shift Swedish inflation in either direction over the short-term. In that perspective, we are also worried that inflationary expectations may continue to be a major concern for the Riksbank. Hence, it seems quite likely that the Riksbank will deliver rate hike(s) according to the monetary policy report (MPR) this fall. However, we also believe that additional monetary tightening will only add to the weakness seen in the real economy in a slightly longer-term perspective. The Riksbank foresees 1.2% GDP growth in 2009. We believe it may turn out well to be below 1% if the Riksbank raises the repo rate in line with its main repo scenario. Hence, given the risk that the Riksbank might actually stick to its hawkish stance, we prefer to take our bet in the mid-segment of the curve and receive e.g. SEK swap 2y2y fwd.
Published on Mon, Jul 28 2008, 14:47 GMT
Archive
- Scandi trade: Pay 2y2y NOK and receive 2y2y SEK
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