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FX Pilot

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 | lahe06@handelsbanken.se

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 | lahe06@handelsbanken.se

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 | lahe06@handelsbanken.se

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