Scandi markets ahead - Danske Bank · Scandi markets ahead 4 | 2 December 2013 Norges Bank: New...
Transcript of Scandi markets ahead - Danske Bank · Scandi markets ahead 4 | 2 December 2013 Norges Bank: New...
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We argue that the Riksbank remains wrongly priced. Over the last week the Swedish fixed
income market has priced out some of the Riksbank rate cut expectations for the next two
meetings and market pricing in fact indicates a probability of a rate hike in autumn 2014,
which we strongly disbelieve will happen.
Swedish PMI manufacturing is expected to rise in November, in line with Germany and
NIER manufacturing index, implying that the divergence between Swedish soft and hard
data will continue for yet another month.
This year’s transfer of the Swedish pension money (PPM) will take place over the
weekend of 7-8 December, with the first trading day being 9 December. We expect the
amount to be close to last year’s SEK33bn (somewhere between SEK33bn and SEK35bn).
We find that since the beginning in 2001 EUR/SEK has more often than not risen in the
days before the PPM date and continue to target 9.00 as a 1M forecast in EUR/SEK.
The big event in the Norwegian market is Norges Bank’s interest rate decision and the
new Monetary policy Report on 5 December. We expect the policy rate to remain at 1.5%.
However, the rate path is now expected to be revised downwards, pushing back the next
rate hike to the first half of 2015. Given the high correlation with relative rates a new
2013-high in EUR/NOK is expected this week. We continue to warn about the poor
liquidity in the Norwegian currency market in December.
A soft Norges Bank could put the NOK under new pressure Sweden: Money market rates to high in 2015/2016
Source: Danske Bank Markets, Macrobond Source: Danske Bank Markets
-0.20%
0.30%
0.80%
1.30%
1.80%
2.30%
2.80%
Oct13 Apr14 Oct14 Apr15 Oct15 Apr16 Oct16 Apr17 Oct17
Pricing SEK-OIS 1m swap
2 December 2013
Chief Analyst Arne Lohmann Rasmussen +45 4512 8532 [email protected]
Scandi markets ahead Another soft Norges Bank Monetary Policy Report
Recommended readings from Danske
See our monthly Yield Forecast
Update that covers Scandi and
core markets
See FX Forecast Update for our
latest FX Forecasts
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Scandi markets ahead
Sweden � PMI in focus
In Sweden, the week ahead will mainly concern November PMIs. On Monday (at 08:30
CET) manufacturing PMI will be published and then on Wednesday (at 08:30 CET)
Services PMI are due to be released. PMI manufacturing is expected to rise in November,
in line with Germany and NIER manufacturing index.
As we have touched upon previously, there is a stark dichotomy between strong survey
data and weaker real data, which continues to be unresolved. Thus far, we have been
inclined to dismiss this as temporary and something that will correct with stronger real
data in the cards. But at some point we will have to give this view up, and any weakening
of the international outlook – or survey data for that matter – would trigger large
downward revisions of our GDP forecasts for the coming few years.
In addition to the weak trade balance and ditto retail sales data, we last week finally
received Q3 GDP numbers and suffice it to say, at 0.3% y/y (calendar-adjusted) it was
uninteresting, a tad below our and the Riksbank’s forecast of 0.4% y/y.
However, much of the softness is attributable to a large negative contribution from
inventories, which is somewhat of a silver lining. The number thus underlines our 2013
GDP forecasts of 0.8% y/y (calendar-adjusted) but, Nota Bene, we need to see a sturdy
acceleration of 0.6% q/q in Q4 to reach that number, which in turn implies that retail
sales, trade balance, etc. need to improve dramatically over the coming months.
In sum, our call for a December rate cut remains intact. The Riksbank needs to cut due to
too low inflation and lower inflation expectations.
Sweden should be priced for �low for longer�
In Reading the markets Sweden we argue that that Riksbank remains wrongly priced.
Over the last week the Swedish fixed income market has priced out some of Riksbank
rate cut expectations for the next two meetings, which seems reasonable in light of the
slightly stronger NIER confidence survey, but we find it hard to swallow the fact that the
pricing after that indicates a probability of a rate hike in autumn 2014, and it stands in
stark contrast with the rate developments for other central banks. Below is the change in
the OIS (overnight indexed swaps), or Stina as it is called in Sweden, between 20-28
November. After the NIER data the Swedish curve shifted up 4-5bp especially from June-
2014 and onwards.
Pricing of Riksbank(OIS), bp change over the last week
Source: Danske Bank Markets
Riksbank stance suffers another blow
Sources: Macrobond, Riksbank
Riksbank pricing
Sources: Macrobond, Riksbank
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Scandi markets ahead
We still see EUR/SEK testing 9.00 in December
The fact that we look for a flatter SEK FRA curve and a rate cut on 17 December also
means that we continue to see short-term upside risks for EUR/SEK. We have for a while
being targeting 9.00 in EUR/SEK and we continue buying the cross after the EUR/SEK
dip on Friday in the aftermath of the GDP numbers that turned out to be a “buy the
rumour, sell the fact” event.
While we have reduced our risk exposure in the money market (see last week’s issue), we
still see the cross edging higher when the rate cut is actually confirmed. Especially, if the
Riksbank at the same time underlines that the first rate will be further delayed. Such an
outcome will tend to flatten the Swedish money market even further and result in a tighter
rate spread vs. the euro area. Note in that respect that EUR/SEK is still highly correlated
with relative rates.
EUR/SEK vs. 2-year swap spread
Source: Macrobond
SEK: PPM disbursement to hit the market 9 December This year’s transfer of pension money (PPM) will take place over the weekend of 7-8 December, with the first trading day being 9 December. We expect the amount to be close to last year’s SEK33bn (somewhere between SEK33bn and SEK35bn).
Part of the money will be invested in domestic funds and part of it in foreign funds. Under the assumption that part of the foreign investment is hedged (on average), we estimate that around SEK10bn will affect the SEK. That said, while sizeable, the evidence suggests the market impact has gradually diminished. If anything, the krona has had a tendency to weaken before the actual transfer date and then appreciate afterwards.
We find that since the beginning in 2001 EUR/SEK has more often than not risen in the days before the PPM date and more often than not fallen after the PPM date; not the PPM effect you might expect but arguably logical from a game theoretical and rational expectations point of view, where investing funds and market players in general have learned to pre-trade on this information. A similar trading pattern around the PPM date applies for volatility in EUR/SEK.
Hence, we see the PPM money as a temporary headwind for the Swedisk krone. For more see FX research: PPM Disbursement – not the impact you might think.
4 | 2 December 2013 www.danskeresearch.com
Scandi markets ahead
Norges Bank: New downward revision of rate path
The big event in the Norwegian market the first week of December is undoubtedly
Norges Bank’s interest rate decision and the new Monetary policy Report on 5 December.
We expect the policy rate to remain at 1.5% with great certainty. However, the rate path
is now expected to be revised downwards.
We expect Norges Bank to push back the next rate hike to the first half of 2015. It is also
possible, but by no means certain, that Norges Bank will revert to its dovish bias earlier
this year by indicating that for next year a rate cut is more likely than a hike.
The chart below illustrates that our estimate of the rate path is very much in line with
market pricing at the time of writing. We should add that we believe that the risk is to the
downside: Norges Bank has on numerous occasions the last year showed a dovish
interpretation of economic statistics. We would not be surprised if this repeats itself this
time around.
Weak Regional Network Report from Norges Bank
Since the previous monetary policy meeting in September, the economic landscape has
changed along several dimensions:
First of all international interest rates have come down considerably, which would lead
Norges Bank to consider reducing the rate path. A somewhat lower inflation pattern, after
the surprisingly high readings over the summer, should point in the same direction.
Last but not least, Norges Bank’s own business survey (Regional Network), which came
out on Friday 29 November, was surprisingly weak. The important survey points to an
annualised growth of less than 1.5% in H1 next year. The overall picture was clouded by
a particularly weak outlook for the retail and construction sectors, which was largely as
expected. What disappointed us most was that optimism in the export industry is not yet
increasing even though the krone has weakened and global growth is improving. Based
on the Regional Network Report we expect Norges Bank to reduce its growth forecast for
Norway for 2014 from 2.25% to 1.75%.
The one factor that counteracts these changes is the exchange rate: The Norwegian krone
has depreciated about 10% since February this year and about 2.5% since the September
meeting. These huge swings will certainly work as a stimulus to Norway’s exporters and
Chart 1: Norges Bank rate paths; the market and projections (%)
Source: Norges Bank, Bloomberg, Danske Bank Markets
Norway: Growth slows further
Source: Macrobond
Weaker NOK not enough to mitigate
weaker growth outlook
Source: Macrobond, Nprges Bank
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Rate path at MPR3.13 Implied by FRA market
DB estimate of new rate path
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Scandi markets ahead
will reduce the need for a rate cut. The aggregate effect of these changes should lead
to a downward shift in the rate path by about 0.25% towards the mid and latter half
of 2014.
Norges Bank has gone to great lengths to be as transparent as possible, by indicating how
it will react to changes in the economic environment along several dimensions. However,
Norges Bank still retains substantial discretion, not least when it comes to its forecast of
growth for Norway and its trading partners in the future. In estimating the rate path for
the upcoming monetary policy report, we have assumed that Norges Bank will leave the
growth outlook for its trading partners unchanged from September. It could, however,
defend a reduction in the growth forecast for Norway’s trading partners by a quarter of a
percent for next year. That could in our experience lead to an additional downward
revision of the rate path by about 0.1%, and a signal of a future possible rate cut
would be clearer.
All in all, it seems to us that Norges Bank after the weaker than expected Regional
Network Report will once again deliver a soft message.
The Norwegian krone remains exposed here in December
The NOK has after the AUD been the second worst G10 performing currency over the
last six months.
Spot-performance against the NOK, %
Source: Bloomberg
But the trouble might not yet be over for the former “Northern star”. The combination of
a soft Norges Bank on Wednesday and a global currency market that has the poor
liquidity in the NOK over the summer in fresh memory and a general lack of interest in
commodity currencies does not bode well for the NOK here in December, where liquidity
is often an issue. Hence, we once again see a pronounced risk that implied volatility will
spike in EUR/NOK, pushing EUR/NOK higher once again as illustrated in the graph to
the right.
In respect of Norges Bank note that EUR/NOK continues to trade closely on relative rates
with EUR/NOK having the third highest correlation with relative rates among 14
EUR/XXX crosses that we cover in FX Hot Picks.
Liquidity remains an issue for the NOK
Source: Macrobond, Nprges Bank
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Scandi markets ahead
EUR/NOK still trading on relative rates and sensitive to Norges Bank message
Source: Bloomberg, Macrobond
From a technical point of view the next target is 8.4050 ( 21 December 2009 high). If this
target is breached a test of the strong resistance level at 8.4380 level (19 December 2009
high) is likely. Note that the cross does not yet look technically overbought with RSI at
66.9. For more support/resistance levels see Danske Technical Update.
In fact, the poor Regional Network Report might indicate that the poor performance for
the NOK might extend into 2014. It is yet another warning that the Norwegian economy
is getting more and more out of synch with the euro zone. The latter is seeing signs of
recovery and Norway is cooling down. In particular, we will follow the important oil
investment data that by the way will be published simultaneously with the rate decision
on Wednesday. Given that oil investments are not easily reversed, we believe the survey
will still point to growth in oil investments in 2014. But risk is tilted to the downside.
However, that said, the growth outlook for 2014 is still much stronger for Norway and in
the end we do now expect to see a rate cut from Norges Bank in 2014 keeping the NOK
in the carry currency camp. Hence, we stick to the view that the NOK will eventually
recover when the current “liquidity premium” is priced out sometime in 2014.
Note that our long NOK/SEK recommendation is now closed with a total profit of 0.55%.
Denmark: Currency reserve numbers in focus
In Denmark the week brings Statistics Denmark’s industrial production data for October.
Manufacturers have generally become more optimistic, due partly to improvements in
local export markets, but we still expect a small decrease of 1% m/m after the rise in
September.
Elsewhere, the Danish Nationalbank will be releasing its report on the foreign exchange
reserves in November. The EUR/DKK cross has been relatively stable below the central
parity rate of 7.46038 throughout November, so there has been no pressure on the fixed
rate policy and we do not expect the central bank to have felt the need to intervene. While
the Danish central bank has not intervened for quite a long time to support the Danish
krone, the Danish money market continue to price in a “normalisation” of the Danish
curve in 2014 relative to the EUR curve.
Last week we saw an agreement reached on the budget for 2014, but this did not include
anything that would have a significant impact on economic growth for next year.
Still high correlation for EUR/NOK
with relative rates
Source: Bloomberg, Danske Bank Markets *
Correlations based on weekly changes using 26-
week rolling window,
DKK rates expected to be above EUR
rates in 2014
Source: Danske Bank Markets
Top 5 correlations with relative rates
EUR-crosses vs. 2Y swap spreads
1. EUR/USD (73%) ↑
2. EUR/CAD (69%) ↑
3. EUR/NOK (68%) ↑
4. EUR/AUD (62%) ↑
5. EUR/NZD (52%) ↑
-0.20%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
Nov13 May14 Nov14 May15 Nov15 May16 Nov16 Jun17
Pricing DKK-OIS 1m swap
28-Nov-13 28-Nov-13 Current policy rate Next policy move
7 | 2 December 2013 www.danskeresearch.com
Scandi markets ahead
Scandi market movers ahead
Source: Danske Bank Markets
Key Data and Events in Week 49
Period Danske Bank Consensus Previous
8:30 SEK PMI Index Nov 52
9:00 NOK PMI Indeks Nov 53.7 53.6
10:00 NOK Credit indicator (C2) y/y Oct 6.1% 6.2%
Tuesday, December 3, 2013 Period Danske Bank Consensus Previous
16:00 DKK Currency reserves DKK bn Nov 491
Wednesday, December 4, 2013 Period Danske Bank Consensus Previous
8:30 SEK PMI services Index Nov
Thursday, December 5, 2013 Period Danske Bank Consensus Previous
9:30 SEK Service production m/m|y/y Oct -0.4%|1.15
Friday, December 6, 2013 Period Danske Bank Consensus Previous
9:00 DKK Industrial production m/m Nov 1.6%
9:30 SEK Budget balance SEK bn Nov -7.4
10:00 NOK Industrial production m/m|y/y Oct 0.7%|-1.4%
10:00 NOK Manufacturing production m/m|y/y Oct 0.3%|� -0.2%|3.2%
The editors do not guarantee the accurateness of figures, hours or dates stated above
Monday, December 2, 2013
8 | 2 December 2013 www.danskeresearch.com
Scandi markets ahead
Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The author of the research report is Arne Lohmann Rasmussen.
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Scandi markets ahead
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