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FX Pilot

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 | lahe06@handelsbanken.se

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 | lahe06@handelsbanken.se

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 | lahe06@handelsbanken.se

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 | nikn02@handelsbanken.no

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