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FX Pilot - Weak commodities to weigh on EM and support the dollar

The start of the year has challenged our EURUSD forecast, but we stick with our expectations of a stronger dollar. Earlier we argued that the US tax reforms would support the dollar and we still believe this will be the case. In this edition, we look at commodity markets and emerging economies. How will they affect the dollar?

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FX Pilot - Weak commodities to weigh on EM and support the dollar

Lars Henriksson


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Swedish Rate Wrap — Did the Riksbank just extend the QE programme?

Ahead of the Riksbank's decision this week, expectations were relatively consistent: a largely unchanged interest rate path and a terminated QE programme. Early repurchase of maturing bonds was also expected. The moderate market reaction following the decision indicates that the outcome was close to expectations. However, in the last Swedish Rate Wrap for this year, we consider whether in reality, the QE programme has once again been extended.

Claes Måhlén, Chief Strategist |

Commodity Bulletin — Turbulence in China as 2018 approaches

China and OPEC fever were the stories in 2017
Commodity prices have increased significantly in 2017. It is mainly the base metal complex that is trading around 20% higher as a result of China's economy having performed strongly in the wake of stimulus from 2015 and 2016. The price of oil has also risen, and while it has only increased 8% over the year as a whole, it has jumped 35% since its low in June. Falling global inventories have been decisive for oil; the market's huge surplus is gradually declining and equilibrium is approaching. OPEC has been given all of the credit, and the extension of the OPEC agreement was hailed by the market.

Turbulence in China during 2018
We believe that China's ongoing production reform will be a more long-term, structural change in the commodities market than was originally announced. By reducing overproduction of some commodities, China can kill two birds with one stone: profitability will increase for producers who remain, and air quality will improve to the benefit of everyone.

Despite this, the first half of 2018 looks critical for China. Stimulus measures have stopped working, the rise in housing prices has levelled off in major cities and both state-owned and private company investments are lower. More stimulus measures will surely follow, but we expect that things will need to get worse first. This means that the next wave of stimulus measures is not expected until the second half of the year. Until then, we see a risk of a temporary dip in base metal prices.

Setback in the desert
We argue that the oil price is also set to drop when the seasonal pattern of decreasing inventories changes direction and starts to rise during the first quarter. Shale oil also faces increased activity after a period of escalated oil prices, starting with more rigs in the fields. We forecast an oil price of USD 51/bbl for 2018.

Martin Jansson, Strategist |

FX Pilot — Closing in on the year end and a stronger SEK

In the previous edition of the FX Pilot, we concluded that EURSEK will be volatile ahead of year end and that there is a good chance of seeing a dramatically stronger SEK between the time of the last Riksbank meeting, December 20, and New Year's Day. We are now in the middle of an eventful week. Both the Fed and the ECB are going into their final meetings of the year, and in Sweden we will find out how the housing market developed in November. Now is the time for EURSEK to start its big decline.

Lars Henriksson, Strategist |

Swedish Rate Wrap — Central bank show imminent

A cavalcade of central bank meetings will bring to an end a fairly undramatic year for monetary policy in global terms, with lower and lower volatility on the fixed income market. Nor is this round of meetings likely to shake the market to its foundations. We expect the Federal Reserve to hike the rate and to repeat its rate-hiking plans for the future. The ECB will not deviate from the soft message that we heard in October. The Bank of England will be waiting to see the results of the Brexit negotiations, while Norges Bank will make the most of its weak currency and strong oil in order to steepen the yield curve.

The Riksbank has the advantage of hearing the results of this week's meetings prior to the final monetary policy discussion of the year on December 19. The main focus will be on whether the QE programme will formally be terminated after year-end, with the Riksbank therefore being prepared to deviate from the ECB's plans next year. We believe this will be the case, but that the news will be couched in an otherwise dovish message.

Kiran Sakaria, Junior Strategist |