SEK may be close to bottoming

Transcription

1 NZD GBP AUD NOK SEK EUR CAD CHF USD JPY FX Pilot December 12, 2012 SEK may be close to bottoming Neutral on risk sentiment Sell EUR/USD on rallies Neutral on EUR/SEK Figure 1: US macro may disappoint further Market view Risk sentiment has improved since our last FX Pilot, with stock markets gaining several percent. Credit spreads have tightened (albeit marginally) and core bond yields have dropped. European debt woes have again caused some consternation after some Italian hubbub. We still see signs of improvement in China and the US, although we are concerned that US macro may continue to disappoint somewhat: the US economic surprise index appears to have peaked, as economists became too optimistic. (Figure 1). Furthermore, the US is currently facing currency headwinds. US ISM will either fall further or EMU PMI will continue to rise (Figure 2). We are hoping for, and expecting, the latter: when the US fiscal cliff is no longer the talk of the town, capex investment should help underpin US and global demand. We keep our view that the EUR/USD should be sold on rallies above 1.30 or so, and keep our neutral stance on EUR/SEK. Sources: Bloomberg, Handelsbanken Capital Markets Figure 2: ISM vs. EMU PMI and lagged FX effect The next FX Pilot will be published January 9. Martin Enlund Table of contents FX view... 2 The Riksbank: macro weakness vs. imbalances... 3 The big picture... 4 FX behaviour... 5 Sources: Handelsbanken Capital Markets, Macrobond G10 FX For full disclaimer and definitions, please refer to the end of this report.

2 FX view EUR/USD sell on rallies Our rates-driven fair value approach to the cross keeps indicating it is trading at lofty levels (Figure 3) ahead of the next FOMC decision on December 12. Figure 3: EUR/USD model: sell above 1.30 If the Fed delivers a QE3 expansion to offset the end of Operation Twist, FX markets may initially react favourably, but we would go against such a move based on valuation concerns. What s more, recent ECB statements suggest that another rate cut may be in the offing. The market is currently pricing in some 50% possibility of a move to negative deposit rates (-25bp) in the euro area in March 2013 or soon after. A rate cut would undermine the cross further. Data will decide: we won t see the smoke clear until the New Year has arrived. EUR/SEK neutral Compared to during early autumn, it is now tougher to make the case for relative underperformance of Sweden in terms of PMI or economic sentiment. Hence it is becoming harder to argue that rate expectations will undermine the SEK. Sources: Bloomberg, Handelsbanken Capital Markets. Note: the model implies a good buying/selling opportunity outside the 95% conf. interval. Figure 4: EUR/SEK and central bank scenarios We still expect the Riksbank to deliver another 25bp rate cut next week (decision due on December 18), which could boost the cross somewhat (Table 1, Page 2). Recent ECB statements suggest that another deposit rate cut may be in the offing: as we ve earlier argued that the medium-term EUR/SEK risks lie on the upside (due to relatively more Riksbank easing) this may cause us to reassess the medium-term risks (for now we stay neutral on the cross). On the one hand, should the Riksbank stay put at 1% after a December rate cut, while the ECB cuts to -25bp, EUR/SEK is indicated lower, at 8.40 or so. On the other hand, if the ECB remains steady while the Riksbank cuts to 75bp, then a move to 9.00 or thereabouts is feasible. Sources: Bloomberg, Handelsbanken Capital Markets Table 1: Riksbank pricing Meeting Market Riksbank, Oct Market vs Riksbank Dec Feb Apr Jul Sep Oct Dec Feb Apr Jul Sources: Bloomberg, Handelsbanken Capital Markets Handelsbanken Capital Markets forecasts 12-Dec < 1 m < 3 m 12-Dec < 1 m < 3 m 12-Dec < 1 m < 3 m EUR/USD AUD/USD Fed USD/JPY NZD/USD ECB EUR/GBP USD/CAD BOE EUR/CHF NOK/SEK SNB EUR/NOK USD/NOK Norges Bank EUR/SEK USD/SEK Riksbank Source: Handelsbanken Capital Markets December 12,

3 The Riksbank: macro weakness vs. imbalances The Riksbank s interest rate announcement on December 18 is approaching. Swedish data since the last meeting present a gloomy story (Table 2). We concluded after the October meeting that the Riksbank s picture of the economy for the upcoming quarters was optimistic and that already available indicators clearly pointed below the Riksbank s forecasts. Hard data have largely confirmed this and forward-looking surveys are still looking for the bottom. The fact is that momentum in Swedish industry is weaker than that in Spain (only Greece s PMI is lower). Consequently, there is a substantial need for a downward revision for the Riksbank. While Q3 GDP ended up a notch over the Riksbank s forecast (0.5%, compared with 0.2% q-o-q), Q4 is expected to end up several percentage points below it. The forecast for 2013 GDP growth is also expected to be lowered, to 1.0% or less from October s 1.8%. The labour market has been surprisingly stable, with respect to both the actual unemployment level and employment. However, lay-offs and indicators suggest weakening in the future. Weaker GDP should also entail hiked unemployment forecasts. While the above factors and especially the labour market provide support for yet another rate cut, some factors suggest otherwise. The unwillingness to cut rates because of household indebtedness should remain, even though the FSA s (Finansinspektionen) proposal about increased risk weights for mortgages may also have made Governor Ingves somewhat less concerned. The debt crisis in Europe is not over, but concerns in the Executive Board about problems in the near term should have eased after an agreement in principle for the Greek payout. Table 2: Weaker data since October meeting Better(+) / Compared to Data Worse(-)* Riksbank GDP + + CPI - - Unemployment + + PMI - na Business conf. - na Consumer conf. - na Retail sales - na Credit grow th = na Industrial production - na Service production - na Trade balance + na Sources: Handelsbanken Capital Markets and Macrobond Figure 5: Unemployment and the repo rate Sources: Handelsbanken Capital Markets, Riksbank and Macrobond Figure 6: RIBA at the front Finally, there is reason to be more optimistic about the US economy, assuming that the fiscal cliff is avoided (which probably will not be settled by the time of the Riksbank s meeting). In summary, the traditional Riksbank framework suggests a rate cut. However, we are less convinced than the market, which is pricing in a probability of about 80 percent. Sources: Handelsbanken Capital Markets, Riksbank and Macrobond December 12,

4 The Big Picture Green shoots in China and the US Figure 7: Stock market decline risks macro downturn US fiscal cliff the most important topic European macro and politics worrisome The US economy has continued to surprise positively, begging the question of how long this can last. It is certain that the previous stock market rise has helped fuel demand and there are few signs that the fiscal cliff is weighing on household sentiment, which is at its loftiest level since H However, the positive impact financial markets have had on demand may be tapering off in Q4, and again stock markets are playing a key role. The recent sell-off in equities risks pushing macro data in a weaker direction compared to expectations (Figure 7). Shorter-term swings aside, the upturn in consumer sentiment and housing market activity suggest potential for a broader-based recovery in the US than any time since the Lehman collapse. The manufacturing sector, which seems to be more worried about the fiscal risks ahead of the New Year, is lagging behind in the recovery. More upbeat consumers should nevertheless push industrybased activity higher (Figure 8). That said, US statistics will be wobblier than usual owing to Hurricane Sandy. And as business sentiment remains downbeat, an upturn here is probably dependent on a successful resolution of fiscal-cliff woes. Green shoots are evident in China, where activity seems to be gradually picking up in the wake of a turnaround in credit growth. Europe is, as so very often, the problem child, with sentiment indicators pointing to an intensifying recession that is now spreading to core countries. Nevertheless, the November readings for eurozone manufacturing PMI as well as the German IFO suggest that industrial activity may be bottoming out in Europe as well. Sources: Bloomberg, Macrobond Figure 8: US - Happier consumers indicate rising ISM Sources: Bloomberg, Macrobond December 12,

5 FX behaviour G10 policy rates G10 three-month interbank rates AUD NZD NOK CAD SEK EUR GBP USD CHF JPY 0.0 AUD NZD NOK SEK CAD GBP USD JPY EUR CHF Source: Macrobond G10 REER valuation Source: Macrobond G10 budget balance AUD CAD CHF NZD JPY NOK SEK GBP EUR USD -15 NOK CHF SEK AUD EUR CAD NZD GBP USD JPY Sources: Handelsbanken Capital Markets and Macrobond Source: IMF G10 asset correlation matrix Source: Handelsbanken Capital Markets USD EUR JPY GBP CHF NOK SEK AUD CAD NZD Legend MSCI World >0.7 >0.6 >0.5 >0.3 <-0.3 <-0.5 <-0.6 <-0.7 Oil, Nymex (fut.) Positive correlation Negative correlation Gold (spot) CRB metals Explanation US TED spread The USD and the commodity currencies (AUD, US OIS spread CAD and NZD) remain strongly correlated to risk sentiment as proxied by MSCI World. The risk/fx US 10y gov correlations have continued to decline somew hat US gov. curve (10y-2y) over recent w eeks. The EUR has become less EMBI spread correlated w ith risk recently. Moody Baa-gov. spread VXY VIX Equity risk premium Note: Changes to effective exchange rates, correlation over past 26 w eeks. Weekly changes / w eekly percentage changes. December 12,

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