Analysts at Nomura suggest that as Riksbank hikes approach, they think current levels in EUR/SEK offer attractive levels to re-engage in strategic short SEK positions.
Key Quotes
“Risk/reward – A useful starting point is what we would need to see to make EUR/SEK fall further. The obvious candidate is positive domestic data surprises. However, with the market already pricing to Riksbank projections, this is unlikely to drive SEK appreciation – unless the market moves towards speculating a steeper repo rate path. We think this is highly unlikely. While the Riksbank wants to hike, we think the communiqué is clear that the approach to normalisation will be cautious and gradual.
Of course, the flip side of this is it only takes a modest negative inflation surprise to see the market question the Riksbank’s narrative. This is because the Riksbank has made normalisation so contingent on data realising forecasts.”
“We remain negative on Swedish growth – We have maintained a negative view on the Swedish growth outlook. Indeed, our composite growth metrics suggest growth has started to drop below trend. This entails a less-positive output gap (note the recent rise in the unemployment rate) and a lower future inflation path. Our measures of slack continue to suggest core inflation will rise near term, but if confidence in medium-term inflation pressures decline, so should the market’s confidence in medium-term normalisation expectations.”
“Riksbank cannot defy gravity – Since the September meeting, the market has taken substantial steps towards pricing Riksbank divergence from the ECB. The Riksbank’s conviction to hike in December or February is clearly higher. However, we think the market has gone too far in extrapolating nearterm conviction on the timing of hikes to the pace of hikes further out. Growth in Europe is showing signs of slowing, as evidenced by today’s soft PMIs. The Riksbank will not want to meaningfully hike rates into a slowing European economy – today’s MPR was clear in highlighting uncertainty is rising. We expect the market to come to terms with this in the weeks ahead.”
“We think current levels offer attractive levels for long EUR/SEK positions. We enter spot positions at current levels of 10.344 setting a target of 10.60 and a stop at 10.19.”
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