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FX Pilot

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 |

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?

Lars Henriksson, Strategist |

FX Pilot — A lesson on the importance of normalisation

Has the equity market ever slid so aggressively on an inflation scare before? We still believe what is really troubling the market is that low or zero productivity gains can only be offset by other factors, such as low interest rates or tax cuts, temporarily. In the long run, improved productivity needs to return to support sustainable gains. If that does not occur, equity prices will start to fall once interest rates climb higher again, especially if the first sign of higher inflation is higher wages. It has not been the easiest start for the new head of the Fed, Jerome Powell, but he is probably grateful to his predecessor for how advanced the central bank's process of normalising monetary policy is. Is there a lesson to be learned for the Riksbank?

Lars Henriksson, Strategist |

FX Pilot — When most things are expensive, the USD and yen are cheap

We are now well into the new year, and it is time to consider our choices for the best FX market ideas for 2018. The year has started positively, just as last year ended, and it is hard to see why that would come to a sudden end any time soon. However, as we conclude in our Global Macro Forecast, we believe we are now at the very peak of the business cycle, and while a more pronounced downturn will not arrive until next year, signs of a slowdown are likely to emerge before that. Abundant access to cheap capital from the equity and credit markets has coincided with generous fiscal policy and low wage gains (despite negative unemployment gaps in many important economies) around the world. It is time to start preparing the ship for a rocky ride, and we are taking aboard the dollar and the yen for a smoother sailing.

Lars Henriksson, Strategist |

FX Pilot — Will the US tax reform boost the dollar?

President Trump and the Republicans managed to squeeze in a radical tax reform in the nick of time in order to have it up and running in 2018. Whereas the changes in income tax are temporary, the changes in corporate tax are permanent, and it all starts at the beginning of this year. It is important to note that it is not only lower corporate tax that will incentivise US companies to bring their profits back to the US. For example, investing the money in the US will be more lucrative, as the new rules allow for quicker expensing of machinery investments. Also, dividends from foreign entities will be exempt from US taxes. We take a look at how this will influence the value of the dollar.

Lars Henriksson, Strategist |