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24 Apr 2013
Forex Flash: Beware of SEK vulnerabilities - Societe Generale
FXstreet.com (Barcelona) - Olivier Korbe, FX Strategist at Societe Generale warns investors of SEK vulnerabilities, noting that the EUR/SEK correlation to risky assets broke up last summer, so that relative rates matter the most since.
He adds that the Riksbank´s dovish turn, gloomy Euro area PMIs, reversing FDI and the current technical picture, all point to EUR/SEK upside. He begins by questioning whether it is still high beta. He notes that the pair has been very sensitive to risky assets cycles for years, as its correlation with US stocks held despite utterly contrasting risk environments. But its collapse since last summer despite a low and stable VIX suggests a regime break.
Further, he see that SEK gyrations could now obey different drivers, noting that EUR/SEK´s relationship to credit risk in the banking sector, and to relative rates. He writes, “When one of these drivers is at work, the other is silent and vice versa. For about a year, only relative rates have mattered for EUR/SEK. Yet the pair has not really been challenged by a major global sell-off since then, but in our view it is now less exposed to alterations in the risk backdrop.”
Next he notes that the Riksbank has postpones the exit as a reduced sensitivity to risky assets does not imply currency resilience. The Riksbank adopted a more dovish stance at its 17 April meeting, postponing a first hike to a much later date while leaving the door open for a cut in Q3. He notes that more easing remains on the cards to bring the CPIF back to the 2% target (from 0.9% last), and to tackle unemployment, which surprised negatively yesterday (8.8% against 8.5% expected).
Further, he sees that there is more room at the bottom for SEK rates that EUR rates. He writes, “While the Riksbank´s main rate is only 25bp higher than the ECB rate, the SEK 2Y swap rate is currently trading 80bp higher the EUR rate. Additionally, following Weidmann’s comments, SocGen economists believe that ECB “rate cut(s) would be largely ineffective. Instead, they believe the ECB is mainly searching for alternative non standard measures to act against financial fragmentation”. All in all, he notes that the relative positioning of the two monetary policies should widen the rates differential, driving EUR/SEK higher.
Additionally, Korbe notes the reversal of cross-border flows, writing, “Slowing European growth certainly threatens the outlook for Swedish exports (70% of the exports rely on Europe). The set of gloomy euro area PMI released yesterday confirms that activity is still contracting.” He also feels that an even more worrisome sign of distrust is that foreign investors are withdrawing cash from Sweden. Last but not least, he sees that from a technical perspective, further upside looks likely. He writes, “EUR/SEK is currently attempting to break a downtrend resistance line which started at the last top in May. Confirmation of the break could open the door to 8.70 initially. We remain long NOK/SEK as well.”
He adds that the Riksbank´s dovish turn, gloomy Euro area PMIs, reversing FDI and the current technical picture, all point to EUR/SEK upside. He begins by questioning whether it is still high beta. He notes that the pair has been very sensitive to risky assets cycles for years, as its correlation with US stocks held despite utterly contrasting risk environments. But its collapse since last summer despite a low and stable VIX suggests a regime break.
Further, he see that SEK gyrations could now obey different drivers, noting that EUR/SEK´s relationship to credit risk in the banking sector, and to relative rates. He writes, “When one of these drivers is at work, the other is silent and vice versa. For about a year, only relative rates have mattered for EUR/SEK. Yet the pair has not really been challenged by a major global sell-off since then, but in our view it is now less exposed to alterations in the risk backdrop.”
Next he notes that the Riksbank has postpones the exit as a reduced sensitivity to risky assets does not imply currency resilience. The Riksbank adopted a more dovish stance at its 17 April meeting, postponing a first hike to a much later date while leaving the door open for a cut in Q3. He notes that more easing remains on the cards to bring the CPIF back to the 2% target (from 0.9% last), and to tackle unemployment, which surprised negatively yesterday (8.8% against 8.5% expected).
Further, he sees that there is more room at the bottom for SEK rates that EUR rates. He writes, “While the Riksbank´s main rate is only 25bp higher than the ECB rate, the SEK 2Y swap rate is currently trading 80bp higher the EUR rate. Additionally, following Weidmann’s comments, SocGen economists believe that ECB “rate cut(s) would be largely ineffective. Instead, they believe the ECB is mainly searching for alternative non standard measures to act against financial fragmentation”. All in all, he notes that the relative positioning of the two monetary policies should widen the rates differential, driving EUR/SEK higher.
Additionally, Korbe notes the reversal of cross-border flows, writing, “Slowing European growth certainly threatens the outlook for Swedish exports (70% of the exports rely on Europe). The set of gloomy euro area PMI released yesterday confirms that activity is still contracting.” He also feels that an even more worrisome sign of distrust is that foreign investors are withdrawing cash from Sweden. Last but not least, he sees that from a technical perspective, further upside looks likely. He writes, “EUR/SEK is currently attempting to break a downtrend resistance line which started at the last top in May. Confirmation of the break could open the door to 8.70 initially. We remain long NOK/SEK as well.”