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FX Pilot

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 | lahe06@handelsbanken.se

FX Pilot — Closing in on the year end and a stronger SEK

In the previous edition of the FX Pilot, we concluded that EURSEK will be volatile ahead of year end and that there is a good chance of seeing a dramatically stronger SEK between the time of the last Riksbank meeting, December 20, and New Year's Day. We are now in the middle of an eventful week. Both the Fed and the ECB are going into their final meetings of the year, and in Sweden we will find out how the housing market developed in November. Now is the time for EURSEK to start its big decline.

Lars Henriksson, Strategist | lahe06@handelsbanken.se

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 | lahe06@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

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