FX Pilot  February 20, 2013

Further SEK strength ahead 

Neutral on risk sentiment

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We remain neutral on EUR/USD

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...and keep our bearish stance on EUR/SEK

Figure 1: Swedish krona not so strong after all

Market view Risky assets have seen mixed development over the past two weeks. Eurozone stock market and credit indices continue to lag, but nonetheless received substantial tailwinds as ECB Draghi sounded soft in the February press conference. Eonia rates dropped, eventually spilling over to Itraxx. Upcoming LTRO2 repayments (first amount due February 22) will be interesting to follow, and should, on balance, help rates rise slightly and thereby underpin the common currency. Elsewhere, markets are sanguine in the face of the Italian general election and looming spending cuts in the US. Both subjects could become issues to trade in coming weeks.

Sources: Handelsbanken Capital Markets, Macrobond, Riksbank. Note: rebased to 100 December 1999.

Table 1: Keep an eye on...

The Italian election (Sunday / Monday) pose a downside risk to the euro, if it results in a hung parliament or an unexpected rightwing win. Relative central bank balance sheets (ECB vs. the Fed) still imply a visit above 1.40 during 2013.

Date EMU Italy EMU US EMU/EU EMU EU US

27-Mar 4-Apr 11/12-Apr 15-Apr

EMU EMU EMU/EU US

24-Apr 2-May 13/14-May 19-May 22-May 29-May 6-Jun 20/21-Jun 26-Jun 27-Jun mid-Jul Sep/Oct

EMU EMU EMU/EU US EU EMU EMU EMU/EU EMU EU US Germany

The SEK will see further central bank/interest rates tail winds as Swedish data continue to surprise positively. Markets will increasingly reflect expectations of Riksbank rate hikes, while expectations on the ECB will remain subdued. The Riksbank is unlikely to counteract krona strength until we see a significantly stronger currency. It is also worth keeping in mind that the krona is still quite weak in real, trade-weighted terms (Figure 1). Martin Enlund – [email protected], +46 8 463 46 33

Table of contents FX view ........................................................................... 2 Will the krona cause Riksbank headache? ..................... 3 The Big Picture ............................................................... 5 FX behaviour................................................................... 6

Event

22-Feb 24/25-Feb 27-Feb 1-Mar 4/5-Mar 7-Mar 14-Mar 27-Mar

Initial LTRO2 repayment amount General election Initial LTRO2 repayment, ECB LTRO (3m) Automatic spending cuts (0.5% of GDP) Eurogroup/Ecofin meeting ECB rate decision EU summit Temporary extension of discretionary spending authority expires. Spending cuts must be fully implemented. ECB LTRO (3m) ECB rate decision Eurogroup/Ecofin meeting Deadline for new budget. If not passed, law makers w ill not get paid until 2014. ECB LTRO (3m) ECB rate decision Eurogroup/Ecofin meeting Debt limit reached (formal) EU summit ECB LTRO (3m) ECB rate decision Eurogroup/Ecofin meeting ECB LTRO (3m) EU summit Debt ceiling trickery exhausted Federal election

Source: Handelsbanken Capital Markets

NOK

SEK

EUR

GBP

CAD

NZD

CHF

USD

AUD

JPY

G10 FX

For full disclaimer and definitions, please refer to the end of this report.

FX view EUR/USD – neutral The first LTRO2 repayment amount is due February 22 and could lead to some supportive upside in euro rates. That said, the upside in rates and the euro is capped following ECB’s February press conference.

Figure 2: EUR/SEK and 2y swap spread scenarios

ECB Draghi then warned it "will closely monitor conditions in the money market" and said that the appreciation has the potential to change the ECB’s assessment of the risks to price stability (new staff estimates are due in March). The Italian election (Sunday / Monday) pose a downside risk to the euro, if it results in a hung parliament or an unexpected right-wing win. With this negative in mind, relative central bank balance sheets (ECB vs. the Fed) still imply a visit above 1.40 during 2013.

Sources: Bloomberg, Handelsbanken Capital Markets, Macrobond

We reiterate a neutral stance for now. EUR/SEK – still bearish The SEK has strengthened considerably as data and the Riksbank has provided positive tailwinds for the currency. We continue to be positive on the SEK given further data improvements due to lagged effects from a weaker currency and wealth effects underpinning domestic demand. Recent upwards revisions to the unemployment rate have nonetheless boosted speculation that the Riksbank may cut rates again in spring, especially in light of recent labour market scenarios. We think this is hoping to much, 1) given the turnaround in the global cycle, 2) the Riksbank’s focus on household lending, 3) uncertainty whether the higher numbers are due to higher NAIRU or not and an 4) abysmal track-record from using such scenarios to draw market or repo rate conclusions (page 3).

Table 1: Market pricing vs. Riksbank Meeting Apr-13 Jul-13 Sep-13 Oct-13 Dec-13 Feb-14 Apr-14 Jul-14 Sep-14 Oct-14 Dec-14 Feb-15

Market 0.87 0.85 0.87 0.88 0.95 1.02 1.11 1.19 1.26 1.32 1.38 1.44

Riksbank, Market vs Feb13 Riksbank 0.95 -0.08 0.95 -0.09 0.97 -0.10 0.98 -0.10 1.12 -0.17 1.29 -0.26 1.41 -0.30 1.54 -0.35 1.67 -0.41 1.77 -0.45 1.89 -0.51 2.02 -0.58

Sources: Bloomberg, Handelsbanken Capital Markets, Macrobond.

If the European debt crisis intensify markedly, the SEK is likely to see renewed upwards pressure as investors flee the EMU – just as we saw last year. Handelsbanken Capital Markets’ forecasts EUR/USD USD/JPY EUR/GBP EUR/CHF EUR/NOK EUR/SEK

20-Feb 1.34 93.4 0.868 1.24 7.41 8.45