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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

Strategist

Foreign Exchange

lahe06@handelsbanken.se

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2018-02-21

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Accelerating out of oil — The birth and death of commodities in an EV world

• In our scenario, 5 percent of the global car fleet will be electrified by 2027
• Nickel, cobalt and lithium are winners in the battery equation
• Oil as fuel to peak by 2027

Martin Jansson, Strategist | nija03@handelsbanken.se

FX Pilot — We stick to our EURNOK forecast

The cooling Norwegian housing market is increasingly getting attention, and the heightened uncertainty is undermining the NOK. The decoupling of the NOK from higher oil prices is another factor adding to the uncertainty for the currency. Our main scenario is for a soft landing in the Norwegian housing market and that a '2-percent economy' should eventually result in a stronger NOK against the EUR. Our year-end target for the EURNOK remains at 9.30. In this report, we also investigate what will happen in the SEK market this year once the big pension flow in Sweden occurs on December 11. We find there is a good chance of more volatility.

Lars Henriksson, Strategist | lahe06@handelsbanken.se

Swedish Rate Wrap — Inflation once again under 2 percent

Nothing lasts forever! After a period when inflation exceeded the Riksbank's target, inflation will once again be under 2 percent in October. This development was expected, but is still a headache for the Riksbank. Having read the minutes of the October meeting, we stand by our view that bond purchases will not be extended after year-end. To reduce the risk of a strengthening krona, we think that the Riksbank will find other, more dovish actions, via the repo rate path and by commencing reinvestments for future maturities during 2018.

Covered bonds in SEK continue to struggle. This is especially so given the performance of equivalent bonds in EUR. We argue that the spreads will tighten in the future.

Commodity Strategy Comment — LME week in three minutes

At the annual LME Week, miners and metal traders gathered in London to discuss markets, the outlook and price contracts for next year. This year's event was an exercise in sharing successful trading stories after one of the recovery's best trading years. Year-to-date, copper is up by 24%, zinc by 24% and aluminum by 27%. Nickel, the only laggard, is up 16%. There was no lack of topics, with the Chinese supply reform starting to bite; China was also seen as the major downside risk, as the sugar hit fades in the property and fixed-asset investment segments of the economy.

Martin Jansson, Strategist | nija03@handelsbanken.se