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FX Pilot

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

FX Pilot — Hard Brexit to weaken the pound ahead

We do not believe a hard Brexit is fully priced in by the markets and expect the sterling to weaken as the new relationship between the UK and the EU takes shape. An expected softer Riksbank and renewed worries about the housing market lead us to revise our EURSEK forecast higher.

Lars Henriksson, Strategist | lahe06@handelsbanken.se

FX Pilot — Will FX volatility remain low? We don’t think so

FX volatility is approaching the lows of 2007 and 2014. Is there any chance things may turn around soon, or are we bound to pay another visit close to all-time lows. To simplify things, we use 3-month EURUSD volatility to represent FX volatility. Deutsche Bank's volatility index shows the EURUSD makes up around 38 percent of the weight, so consequently, they have been moving in tandem (Figure 1). Just over a month ago, we concluded that the reduced dollar supply resulting from the Federal Reserve's QT-plans will work to strengthen the dollar against the euro. Now, we also argue that the increasing rate difference in the basis swap will serve to increase volatility.

Lars Henriksson, Strategist | lahe06@handelsbanken.se

FX Pilot — Any chance of necessary reforms after the Japanese election?

Lack of progress in the Japanese economy after years of Abenomics has caused a significant drop in popularity for Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP). Lately though, Abe's popularity appears to have improved given that the Japanese public is "rallying around the flag" in the face of North Korean provocations. Prime Minister Abe has decided to seize this opportunity and has called for snap elections on October 22. There is a good chance that Abe will win the election and we believe this will be yen-positive as this might well mean further reforms to strengthen the labour force.

Lars Henriksson, Strategist | lahe06@handelsbanken.se

FX Pilot — Have you heard of the September 29 Riksbank meeting?

Ironically, an upcoming decision from the Riksbank's General Council may interfere with the ambitions of the Executive Board to prevent the SEK from strengthening. The second term of Stefan Ingves's governorship is approaching its end. If he leaves, it will mark the end of the longest period that a Riksbank governor has completed since 1973. There is speculation that he could remain for another term, but the minimum period is five years. Practically any other candidate would incite speculation about a tighter monetary policy. Stay alert on September 29, the probable date of the announcement.

Lars Henriksson, Strategist | lahe06@handelsbanken.se

FX Pilot — Reduced dollar supply from Fed’s QT plan will impact EURUSD

We take a look at how, in previous years, the increased dollar supply from the growing balance sheet of the Federal Reserve affected basis swaps and contributed to the weaker dollar. Now, we are in a situation where the ECB will continue to expand its balance sheet as the Fed prepares to start shrinking its. We believe that the relative balance sheets of the ECB and the Fed will soon start to impact basis swaps, thereby cooling off the EURUSD rally.

Lars Henriksson, Strategist | lahe06@handelsbanken.se