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FX Commentary

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Riksbank U−turn completed

Fri, Oct 24 2008, 13:54 GMT
by Stefan Mellin

Danske Bank A/S

A step in the right direction

• The Riksbank (RB) cuts 50bp and indicates a further 50bp within the coming six months. We had expected 25bp but welcome warmly the bold decision to go for 50. In our view this is not panic but rather a prestige-less shift in assessment of the economy resulting in a more frontloaded monetary policy forecast. 

•  The U-turn completed. After hiking 3 Sep the RB has now cut 100bp 1 ½ month later. The risk that RB will be left (un)safely behind the curve has diminished. 

• Credibility: An unpredictable RB where the public has difficulties understanding its thinking, and thus policy actions, has added a risk premium on the SEK. RB is now taking a step in the right direction which is good for confidence and could reduce the risk premium. 

• Initial reaction was knee jerk; lower yields on relative basis and weaker SEK. Over time though we think that it is a better medicine for the SEK with a proactive and credible policy than it being stubbornly tight. 

• The economic outlook has deteriorated sharply recently. We forecast zero GDP growth 2009 and a substantial rise in unemployment. The RB is close to zero for GDP but still too optimistic on unemployment (6.9% 2009 vs DB 7.8% on avg). RB revises its inflation forecast sharply lower and now is very close to our until mid 2009, H2 our forecast is lower. 

• Hence, we stick to the view that the RB cuts the repo rate to 3.25% by Q2 which is line with their own forecast. Thereafter we see an additional 50bp in H2 taking the repo rate down to 2.75%. Market pricing indicates 2.75% by mid 2009. This is too aggressive relative to our forecast .

• A recession-like economy is likely to weigh further on the SEK. That said, EUR/SEK at current levels above 10.00 are not justified by fundamentals but reflect heightened risk aversion, rebalancing needs, NOK contagion (?) and poor liquidity - S/T fair value ca 9.70. Near term more of forced SEK selling could arise though as global stock markets still head lower.

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Published on  Fri, Oct 24 2008, 14:00 GMT