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FX Pilot

FX Pilot — How will looser capital restrictions impact the CNY?

Capital restrictions are once again being loosened in China, with domestic stock and bond markets being opened up for foreigners. This is part of China's strategy to integrate its financial markets with the rest of the world, and ultimately to make the CNY a new global reserve currency. Opening up does not necessarily imply net capital inflows and give a stronger currency; we continue to expect a slightly weaker CNY versus the USD in the short run amid general USD strength.

Bjarke Roed-Frederiksen, Senior Economist |

FX Pilot — Communication problems at the Riksbank

As expected, the Swedish Riksbank last week decided to push back its forecast for a first hike of the policy rate. Finally, the rate-setting board also gave the impression of no longer worrying about a strengthening krona. In the press release following its latest monetary policy meeting, the Riksbank board changed the wording on the krona from "important that the krona does not appreciate too quickly" to "important that the krona exchange rate develops in a way compatible with inflation stabilising close to the target". Their stance also changed from being prepared to "implement further monetary policy easing" to being "prepared to adjust monetary policy". In combination with a very bullish SEK forecast, this makes us think that the Riksbank has had enough of SEK weakness and even wanted to prevent further depreciation. However, something appears to have gone very wrong.

Lars Henriksson, Strategist |

FX Pilot — Inflation is not strong enough to keep the Riksbank on track

The weaker inflation numbers, especially CPIF excluding energy, lead us to believe that the Riksbank will decide to postpone its next rate hike from September to December at next week's Executive Board meeting. The krona is much weaker than the Riksbank's latest forecast, currently trading around 6.5 percent below forecast, leading us to believe in a minor revision to the rate path. With the risk of echoing a message from the past, we still believe the EURSEK is too high. Now that the UK and the EU have managed to agree on a transition period for the Brexit process, it is time to move on to negotiating the future relationship. Domestic UK politics do not make this second phase look any easier.

Lars Henriksson, Strategist |

FX Pilot — The Riksbank has managed to take the SEK back to crisis levels

The EURSEK is now trading at the same level as it did at the end of the great financial crisis, and the same is basically true for the KIX index. The combination of the low reading for inflation in January and uncertainty in equity markets is guiding the SEK lower and lower. Still, if the next inflation number is in line with expectations, or higher, it is hard to see the Riksbank changing the current repo rate path at the upcoming April meeting, as long as the EURSEK remains elevated. This will be positive for the SEK and we therefore stick to our forecast of a lower EURSEK.

Lars Henriksson, Strategist |

FX Pilot — Not enough money to cover the debt

The giant leap in the Libor-OIS spread has puzzled us all. More and more analysts have concluded that the widening spread is due to a temporary oversupply of T bills (among other things) and that it will soon pass with limited effects on credit markets. We largely agree but remain alert in case the situation deteriorates. Whatever the outcome, we view the USD as the ultimate winner.

Lars Henriksson, Strategist |

FX Pilot — NOK to continue to strengthen at a slow but steady pace

The NOK has managed to hold on to most of its gains since the beginning of 2018, despite the increased risk-off sentiment seen since late January. The backdrop is an improved economic outlook, which was confirmed by Norges Bank's latest Regional Network Survey, which was mainly conducted in January. We do not think the modernised regulation on monetary policy from the Ministry of Finance, which set the inflation target at 2 percent (previously 2.5 percent), should have any short-term impact on NOK rates and the NOK exchange rate. The FX market has not agreed with our views in terms of EURUSD and EURSEK, and we therefore revise our forecasts for these currency pairs. We recognise the fact that the prospects for Swedish inflation worsened after the January reading and the probability of a rate hike from the Riksbank in September has decreased. We therefore raise our forecast for EURSEK. When it comes to EURUSD, we still await the effects of the tax reform and expect it to fall, but at the same time, we face the reality of it being too far off our forecast.

Nils Kristian Knudsen, Strategist |