150623 scandi fx strategy

FX Watch

Group Economics Macro & Financial Markets Research Georgette Boele +31 20 629 7789

Scandi FX Strategy

23 June 2015 • • • • •

The Norwegian krone and Swedish krona have outperformed the euro so far this year… …reflecting a weak euro and stronger-than-expected domestic economies We expect weakness in the Norwegian krone and Swedish krona in there months ahead …because of more monetary policy easing The Danish krone is expected to stay in the currency regime

Scandinavian do well so far this year

Fighting deflation remains a priority for the Riksbank

After the aggressive sell-off in 2014, the Norwegian krone and

Inflation has been too low in Sweden. The minutes of the April

the Swedish krona outperformed the euro so far this year, but

meeting show that a more expansionary monetary policy is

they have underperformed the US dollar. Why is this? The

required to ensure that inflation rises towards the target

euro has been weak this year whereas the economies of

sufficiently quickly. At that meeting, the board decided to

Norway and Sweden were not as weak as feared.

purchase government bonds for a further 40-50 bn. In addition,

Furthermore, the Danish krona has remained within the tight

the repo-rate path was lowered significantly compared to the

range. The focus of Scandinavian central banks has not

decision in February.

changed; they have continued their monetary policy easing.

However, their motivations have differed. The Swedish central

Riksbank repo rate

bank or Riksbank has been mainly focused on low inflation or

in %

deflation. In contrast, the Norges Bank has been sensitive

10.00

about domestic economic growth despite inflation being close 8.00

to target.

6.00

EUR/SEK, EUR/NOK

4.00

EUR/SEK

EUR/NOK

10.0

10.0

2.00 0.00 -2.00

9.5

95

9.0

00

05

10

15

Riksbank repo rate

9.0 8.0

Source: Bloomberg

8.5 8.0 Jan 13

Jul 13

Jan 14

EUR/SEK (lhs)

Jul 14

Jan 15

7.0 Jul 15

EUR/NOK (rhs)

Source: Bloomberg

Furthermore, Danish central bank is mainly focused on keeping the EUR/DKK range relatively stable and within the currency regime. It has been heavily intervening to stop speculation that the currency regime would be dropped. So far its actions have proven to be a success.

Swedish headline CPI Yoy in %

18 16 14 12 10 8 6 4 2 0 -2 80

85

Source: Bloomberg

90

95

00

05

10

15

2

Scandi FX Strategy – 23 June 2015

Recently, inflation data surprised on the upside. Headline CPI

It signaled that the key policy rate may be reduced further in

yoy has moved into positive territory again (0.1%). As a result,

the course of the autumn. Therefore, the Norwegian krone

the probability of further monetary easing by the Riksbank this

slipped after the result. The Norges Bank also stated that the

year has decreased. However, we judge it is too early to call

krone depreciation in 2014 will underpin consumer price

the end of deflation. Since 2013, Swedish headline inflation

inflation in the coming period. Currently CPI is close to target

has moved in a -0.65% to 0.25% range and it frequently

(2.5%). While further ahead, lower wage growth and fading

moved above zero. We expect further monetary policy easing

effects of the weaker krone will pull down on inflation according

in the form of more quantitative easing, a lower repo-rate path,

to the Norges Bank.

further rate cuts or a combination of these. In case the krona were to strengthen considerably, the Riksbank would see this

Norges Bank compared to ECB

as a threat to its inflation target. It is therefore likely that it would step up monetary policy easing in such an occasion. It seems to have a preference for a weaker krona, because this would help in reaching its inflation target. The Riksbank will decide on monetary policy on 2 July and more easing is likely.

This should weigh on the krona going forward.

3M Swedish interest rate In %

8 7 6 5 4 3 2 1 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

0.30

official rate Norges Bank

0.20 0.10

refi rate ECB

Source: Bloomberg

0.00 -0.10

Looking ahead, our energy analyst expects oil prices to

-0.20

weaken in the coming months because of supply overhang

-0.30

and lower risk-premium. This will weigh on the Norwegian

-0.40 Jun 15

economy and on the krone. The krone has a tendency to Dec 15

Jun 16

Dec 16

Jun 17

weaken when oil prices fall (see graph below). Therefore, it is likely that the krone will also weaken. The negative effect of

Source: Bloomberg

lower oil prices on the economy will probably trigger more monetary policy easing as was already signaled by the central

Norwegian inflation around target

bank. However, the Norges Bank probably wants to avoid a sharp weakening of the krone, because pass-through effects on inflation. This may limit the room to manoeuvre for the

6

Norges Bank. But growth has a higher priority than inflation at

5

the moment.

4 3

Norwegian krone strongly influenced by Brent oil

2

Effective exchange rate Norway

Brent oil price

1 120

0 -1 07

08

09

10

CPI yoy

11

12

13

14

15

Underlying CPI yoy

150 125

110

100 100 75

Source: Bloomberg

90

Growth the priority for the Norges Bank On 18 June, the Norges Bank cut interest rates by 25bp to 1.0%. It stated that developments in the Norwegian economy

50

80

25 07

08

interest rate. This decision was in line with market consensus.

10

11

12

Effective exchange rate Norway (lhs)

have been weaker than expected and that the economic outlook has deteriorated. Therefore, it lowered the official

09

Source: Bloomberg

13

14

15

Brent oil price (rhs)

3

Scandi FX Strategy – 23 June 2015

Further down the road, we expect the Norwegian krone to recover if oil prices rise again later this year and the economic growth picks up.

ERM2 (see box) the ECB is also committed to protecting the peg. The main objective for Danmarks Nationalbank is to ensure stable prices, i.e. low inflation (below but close to 2%, similar to the target of the ECB). This is achieved through the

Danmarks Nationalbank successfully stabilised EUR/DKK

monetary and exchange rate policy. As the policy of

In the weeks following the Swiss National Bank’s decision to

Danmarks Nationalbank is aimed at keeping the krone stable

abolish the floor in EUR/CHF on 15 January, there was

against the euro; it usually changes its interest rates in sync

increased demand for the Danish krone. This was because of

with monetary policy rates of the ECB. To avoid the

market expectation that the currency regime in Denmark would

strengthening of the krone it will probably intervene again in

be ended. To counter this speculation, the Danmarks

currency markets. It judges that it has scope for unlimited

Nationalbank has heavily intervened in currency markets

intervention, because there is no upper limit to the size of

(selling the krone) and has lowered interest rates. In addition,

foreign exchange reserves. In addition, it could cut interest

the Ministry of Finance decided (at the recommendation of the

rates below that of the ECB because of the absence of QE in

Danmarks Nationalbank) to suspend issuance of Danish

Denmark (apart from FX intervention) and inflation being far

government bonds as from 30 January. These actions have

away from its target.

resulted in more stability in EUR/DKK.

Denmark FX reserves Denmark official rates

In DKK bn

Thousands

In %

6.0 4.0 2.0 0.0

800 700 600 500 400 300 200 100 0 90

-2.0

95

00

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Discount rate Repo rate CD rate

05

10

15

FX Reserves Source: Bloomberg

Source: Bloomberg

Our Scandinavian currency forecasts Level, changes in bold/red

Denmark inflation

23-Jun Q3 2015 Q4 2015 EUR/SEK 9.2151 9.50 9.50 EUR/NOK 8.7450 9.00 8.50 EUR/DKK 7.4617 7.46 7.46 NOK/SEK 1.0537 1.06 1.12 Source: ABN AMRO Group Economics

In %

4.0 3.0

Q1 2016 9.50 8.50 7.46 1.12

Q2 2016 9.50 8.25 7.46 1.15

Q3 2016 9.50 8.00 7.46 1.19

Q4 2016 9.50 8.00 7.46 1.19

2.0

Box: History of Denmark’s exchange rate policy

1.0

Denmark has conducted a fixed-exchange-rate policy since the

0.0

early 1980s, initially against the Deutschmark and then against

-1.0

the euro. This policy has provided a solid anchor for low and 10

11

12

13

Headline inflation

14

15

Core inflation

stable inflation expectations in Denmark. The formal framework for the fixed-exchange-rate policy is the European Exchange Rate Mechanism, ERM2. The central rate is

Source: Bloomberg

Policy of permanent anchoring…

Since the 1980s Denmark has had its exchange rate anchored to the Deutschmark/euro, as it judged that the resulting stability would have positive effects on inflation and growth. The eurozone is its largest trading partner. For example 38% of its exports are destined to the eurozone. As Denmark is part of

746.038 krone per 100 euro and an ERM fluctuation band of +/-2.25%. This means that the krone can only fluctuate between 762.824 per 100 euro and 729.252 per 100 euro.

Since the late 1990s, the central bank has stabilized the krone at a level closer to the central rate. There is the obligation to intervene by the central bank and ECB if EUR/DKK reaches a fluctuation limit.

Source: Danmarks Nationalbank

4

Scandi FX Strategy – 23 June 2015

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