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
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Scandi FX Strategy – 23 June 2015
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