Too early to worry about SEK strength

FX Pilot  July 25, 2012 Too early to worry about SEK strength  Neutral on risk sentiment  Still negative on EUR/USD  Still bearish on EUR/SE...
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FX Pilot  July 25, 2012

Too early to worry about SEK strength 

Neutral on risk sentiment



Still negative on EUR/USD



Still bearish on EUR/SEK

Figure 1: Spanish banks selling govvies

Market view Risk sentiment has gone nowhere over the past two weeks. Greek euro exit fears and Spain’s debt sustainability are again in the market’s focus. GGBs amounting to EUR 3.1bn mature on August 20. It is not clear how Athens will be able to meet this redemption. Elsewhere, Spain is in the limelight. With the country facing redemptions of EUR 72bn (not including its regions!), the country looks likely to need a proper bailout, especially given the lack of a natural buyer of Spanish bonds. Spanish banks have been selling government bonds since March (Figure 1).

Sources: Handelsbanken Capital Markets, Macrobond

We still recommend selling EUR/USD on rallies (the Federal Reserve’s August 1 meeting poses an upside risk, pages 2, 46). According to an unemployment gap-based approach, the ECB should lower rates to -150bp by Q1 2013 (Figure 2).

Figure 2: ECB should cut rates to -150bp

While the Swedish krona has been strengthening lately, we think it is a bit too early to expect the Riksbank to become a substantial headwind for the currency. We keep our bearish stance on EUR/SEK (pages 2-3). Martin Enlund – [email protected], +46 8 463 46 33

Table of contents FX view ........................................................................... 2 SEK strength not a problem for the Riksbank ................. 3 Federal Reserve still has ammunition ............................. 4

Sources: Bloomberg, Handelsbanken Capital Markets, Macrobond. Note: 11.5% is the consensus estimate for the unemployment rate.

The big picture ................................................................ 7 FX behaviour................................................................... 8

NZD

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G10 FX

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

FX view EUR/USD – sell on rallies • Euro sentiment has been dented further by German officials expressing scepticism whether Greece will be able to meet the Troika’s demands and rumours regarding the IMF’s participation in another EUR 50bn aid package. •

GGBs amounting to EUR 3.1bn mature on August 20. The Commission has indicated Greece will not get its next payout until September. It is not clear how Athens will be able to meet this redemption.



Elsewhere, Spain is in the limelight. With the country facing redemptions of EUR 72bn (not including the regions!), the country looks likely to need a proper bailout.



A bailout, either via ESM bond purchases (on the primary market) or by becoming another “programme” country, will probably trigger fears concerning the capacities of the EFSF and the ESM



We also expect the ECB to cut rates further, undermining the EUR.



While the Fed may signal that rates will stay extremely low until mid-2015 on August 1 (an upside risk, especially in light of the rate-implied fair value indicated around 1.25), such a move should be used to sell the cross.

EUR/SEK – bearish • EUR/SEK has plummeted to new euro-era record lows despite relative interest rates being fairly steady. •

On the one hand, the valuation is stretched. On the other hand, we suspect Swedish rates will head higher in relative terms.



Gauging by the Riksbank’s strong currency scenarios in the February MPR, it will not need to lower interest rates more than what is currently priced in until we are below 8.20 (page 3).

Figure 3: EUR/USD and swap spread basket (2y, 5y)

Sources: Bloomberg, Handelsbanken Capital Markets, Macrobond

Figure 4: Eurozone portfolio flows less supportive

Sources: Bloomberg, Handelsbanken Capital Markets, Macrobond

Handelsbanken Capital Markets’ forecasts EUR/USD USD/JPY EUR/GBP EUR/CHF EUR/NOK EUR/SEK

25-Jul 1.21 78.1 0.778 1.20 7.38 8.43