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FX Strategy

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EUR/SEK: Riding the right range

Fri, May 23 2008, 10:31 GMT
by Stefan Mellin

Danske Bank A/S

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We see potential for EUR/SEK heading lower in the coming months, based on relative fundamentals, a hawkish Riksbank, a more constructive technical picture, and a rise in risk appetite. As long as markets are less singlemindedly focused on risk aversion, EUR/SEK will be more susceptible to macroeconomic developments and relative yields. That said, we must take into account that EUR/SEK has already made significant losses from the winter highs and that the summer season is nearing, with the normal risk for spikes in the pair – perhaps this time around coupled with unwelcome developments in the Baltic region. Moreover, it cannot be ruled out that the recent aggressive rise in energy prices will take its toll on equities and therefore present a threat to the downtrend in EUR/SEK. While EUR/SEK has been edging lower primarily on rising risk appetite (see chart 1), it has been consistent with our short-term models, suggesting fair value at around 9.32 and an implied range of 9.24 to 9.40. The model offers sell and buy signals on a frequent basis and therefore we have favoured selling – not buying – EUR/SEK at the upper end of the implied trading range and believe it to be the superior strategy (see chart 2). With market expectations intact of the ECB and the Riksbank staying on hold, EUR/SEK is likely to remain within the implied range.

We expect the Riksbank to stay on hold for the rest of the year (and cut in 2009). However, in the near term the risk is rather that the Riksbank will be more hawkish – not dovish – at the July Monetary Policy Meeting and possibly express this by raising the repo rate forecast due to: 1) the recent aggressive rise in energy prices, which leads to inflation staying above the Riksbank forecast in the coming months, 2) still-strong labour market with employment growth year to date also coming in stronger than forecast, and 3) the first quarter GDP forecast at 3% y/y (Riksbank 2.8%. Market pricing (OIS) is suggesting that the Riksbank will stay on hold throughout the year and we agree, but as mentioned, the risk is rather on the upside. The probability for a rate cut from the ECB has clearly diminished but if it delivers (in line with DB forecast) we should see a downshift in the spread-implied trading range.

Privatisation flows are a latent theme. Vasakronan, worth some SEK 40bn, is in the midst of a due diligence process and thus is probably first in line. The general view is that it will be a pure domestic affair. If that is correct it would leave no imprint on SEK of course. But if acquired by a foreign name it might support SEK given the fact that currency debt is already down to its long-term target (15%) after the selling of Vin & Sprit even though some of the revenues would probably be used to repay maturing currency debt. The usual caveat is that these kinds of crossborder acquisitions are often financed in local currencies and if so the impact on SEK would be zero. The government ’s SEK 90bn share in Telia Sonera, SEK 40bn share in Nordea and some SEK 6bn share in SBAB could potentially support SEK but are probably due later.

Hence, we continue to see potential for lower EUR/SEK; the risk is that a wave of risk aversion will push the other way. We therefore recommend scaling down some of the short exposure. As long as market expectations of the ECB and the Riksbank staying on hold throughout the year are intact, we prefer strategies that benefit from EUR/SEK staying within the implied range. We recommend a leveraged EUR/SEK Pivot with range 9.22 / 9.42 and the pivot at 9.32, hence buy weekly at 9.22 when below 9.32 and sell weekly at 9.42 if above 9.32.

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Published on  Fri, May 23 2008, 10:35 GMT