Buy Treasuries. Short Scandis. Wear Diamonds – Nordea

Andreas Steno Larsen and Martin Enlund from Nordea highlights the US President Donald Trump’s tariff-war as the force that can push the Federal Reserve towards deeper rate cuts while also negatively affecting the European Central Bank (ECB) and the Bank of Japan (BOJ) as well. The due also cite BOJ’s policy paralysis and the loss of Swedish Krona (SEK).

Key quotes

• An early end to QT is obviously a slight liquidity relief, but it will not matter a lot short-term as the US Treasury will withdraw liquidity as part of the rebuilding of the liquidity buffer after the debt ceiling suspension.
• We have been banging the drum on the slightly counterintuitive idea that QE leads to higher long bond yields, while QT leads to lower bond yields.
• As long as liquidity is withdrawn from USD markets, we see less hope of a return to the lower quadrants of the USD smile.
• The USD will likely be stronger for longer.
• BoJ’s yield-curve-control have turned into a big issue for them as the dovishness from other central banks involuntarily leads BoJ in a relative hawkish direction.
• The ECB promises to stay negative for even longer are bad news for the already struggling European banking sector.
• The EUR seems to struggle when the disinflationary low for longer impulses are in the driving seat. 
• One reason why EUR/SEK remained bid over the week could be the imminent restart of the Riksbank purchase program over the coming weeks. The official restart of purchases is 1st of August, but it seems as if the Riksbank has postponed the restart another week compared to 2018.