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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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FX Comment — We revise our EURUSD forecast

  1. We revise our EURUSD forecast
  2. The tax reform dominates the short picture
  3. We forecast a slightly stronger dollar in the coming year

Lars Henriksson, Strategist |

Commodity Strategy Comment — OPEC and non-OPEC extended the deal

OPEC and non-OPEC agreed to extend production cuts to the end of next year, as the target to bring global stocks down to their five-year average has not yet been achieved. However OPEC plans to revaluate the accord at the OPEC meeting in June; it is not simply a clean nine-month extension. Russia finally agreed to continue to work with OPEC and won the battle of being the most influential participant in the deal by refusing to announce its intensions ahead of the meeting. An exit strategy seems to be less of a problem, as Novak and Al-Falih say they have come to the joint conclusion that they are far away from reaching the final goal.

Martin Jansson, Strategist |

FX Pilot — The right time to sell EURSEK

EURSEK volatility has returned with a vengeance ahead of year-end and an packed schedule of events, such as the calculation of the resolution fee, the distribution of PPM money and the Riksbank's December meeting being spiced up by concerns about the housing market. With many similarities to last year, we think EURSEK will be-have in much the same way as it did then. Ultimately, the Riksbank will have the final say, as the last meeting of 2017 is due very late in the year. Focus will be on the decision to end or prolong QE. We see it ending and stick to our view of a lower EURSEK.

Lars Henriksson, Strategist |

Swedish Rate Wrap — Housing market is calling the tune

The fall in house prices during the autumn has caused concern on the market that Sweden may be poised for a trend similar to that seen in Denmark ten years ago. We make comparisons, and conclude that there are similarities, but that the differences are decisive, particularly the current absence of an interest rate upturn, and thus rising housing costs. In addition, the largest drop in prices in Denmark came in conjunction with the financial crisis. In the absence of a sharp upturn in mortgage rates or an external shock, a major fall in Swedish house prices would appear less likely. In addition, the continuing strength of data should reduce the concern about a broader slowdown in the Swedish economy.

For the Riksbank, the housing market trend may mean slightly more difficult terrain to manoeuvre in. We believe this supports the line of wait-and-see before making a change in monetary policy, despite the strong economy and an inflation rate close to the target.

Concern about house prices has also rubbed off on slightly higher spreads for Swedish covered bonds. With interest rates remaining low and tight spreads in the equivalent EUR-denominated instruments, we continue to see value in covered bonds.

Kiran Sakaria, Junior Strategist |

Commodity Strategy Comment — The show must go on in Vienna

Along with the market, we expect an extension of oil production cuts from OPEC and Russia at the upcoming OPEC meeting in Vienna on November 30. OPEC is sailing with a strong tailwind, as a draw on global stocks has started, and compliance reached more than 100% in both OPEC and non-OPEC in October for the first time. For H1 2018, we see compliance with proposed cuts as less of a problem; instead, market focus will move to global stocks, which will likely start to flatten as the seasonal tailwind has swept through and there is higher activity in US shale after oil traded above USD 60.

Martin Jansson, Strategist |