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Get used to Scandinavian parity WEDNESDAY 9 SEPTEMBER 2015 Global markets were caught off guard as China devalued its currency on 11 Aug. The move was seen as raising downside risks to Chinese growth with widespread knock-on effects for the global economy. But risk appetite probably collapsed due to other factors as well such as crowded positioning, new regulations curbing liquidity and “computerized” trading. Although we expect weak risk appetite near-term we believe markets have overreacted as we have constructive views on US, EMU and even Chinese growth. FX markets will needless have to pay more attention to growth prospects going forward and not only central banks. Recent risk averse market behavior showed various unusual characteristics, with the USD falling back while the SEK surged; in our view such moves reflected speculative market positioning and are therefore no more than short-term phenomena. Reasonably reassuring growth data/ leading indicators later this year will reestablish “old” FX trading patterns and trends. Countries/ currencies heavily dependent on commodity exports to EM/China, whose central banks have scope to cut interest rates further and whose currencies are still overvalued will depreciate further (including the AUD and NZD). Regarding the previously bullish USD outlook, prospects have admittedly deteriorated somewhat as: 1) Fed will only very cautiously hike rates and; 2) Asian/EM central banks continue to sell US treasuries with potentially negative implications for the USD. The euro flow outlook has improved but as the ECB is close to easing monetary policy even further, we expect EUR/USD rallies to fade before 1.15. A number of political elections/events also continue to add a risk premia on the common currency. Our FX Scorecard ranking remains (very) SEK-positive, with only the Riksbank resisting the currency’s continued trade-weighted appreciation. Finally, the NOK outlook remains fragile: while the currency is attractively priced we expect it to remain weak. We project NOK/SEK below parity H2 2015. EDITOR Carl Hammer + 46 8 506 231 28 BUY THE CS BASKET We recommend buying USD (33%), SEK (32%), GBP (25%), JPY (10%) vs selling EUR (-6%), CAD (-6%), CHF (-16%), NOK (-19%), AUD (-22%), NZD (-31%). SELL EUR/USD ON RALLIES We rank Fed as a less positive USD-factor now. However the increasing risk of ECB expanding QE-purchases will weigh on EUR H2 2015. SELL NZD/CAD CAD has weakened beyond our previously bearish forecasts as the economy entered recession in H1 2015 and the currency is now slightly undervalued according to our models. RBNZ continues to ease monetary policy and the kiwi remains overvalued. SELL NOK/SEK Despite trading near multi-year lows we think the Nordic commodity currency is vulnerable in the context of low oil prices/weakening growth. Both currencies are now undervalued but Swedish growth at 3% 2015/16 will contribute to NOK/SEK trading below parity H2 2015. TECH: BUY USD/SEK Bullish wave pattern (triangle) supports continued upside targeting 9.33. Stronger USD view should be reconsidered below 8.03. QUANT You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice. Currency Strategy Forecasts and FX Scorecard FX forecasts EUR/USD EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK EUR/DKK USD/RUB SEB Consensus* Contents Forecasts 08-Sep Q3 15 Q4 15 Q1 16 Q4 15 Q1 16 1.12 134 0.73 1.09 9.42 9.23 7.46 68.4 1.10 132 0.72 1.09 9.40 9.25 7.46 69.0 1.08 133 0.70 1.09 9.20 9.40 7.46 70.0 1.04 130 0.69 1.10 9.00 9.35 7.46 71.0 1.07 134 0.69 1.08 9.35 9.00 7.46 67.0 1.06 134 0.68 1.08 9.30 8.90 7.46 66.0 120 1.54 1.32 0.98 0.70 0.63 8.44 12.97 7.04 8.63 1.02 8.27 6.37 120 1.53 1.34 0.99 0.71 0.63 8.55 13.07 7.12 8.62 1.02 8.41 6.50 123 1.54 1.36 1.01 0.66 0.59 8.52 13.12 6.93 8.44 0.98 8.70 6.60 125 1.51 1.40 1.06 0.64 0.56 8.65 13.07 6.92 8.18 0.96 8.99 6.60 125 1.54 1.33 1.01 0.70 0.63 8.74 13.46 6.99 8.66 1.04 8.41 6.21 126 1.55 1.33 1.02 0.70 0.63 8.77 13.60 6.96 8.61 1.04 8.40 6.17 The big picture USD EUR JPY GBP CAD AUD NZD CHF SEK NOK DKK RUB CNY Internal scandie flows Contacts Disclaimer Cross rates USD/JPY GBP/USD USD/CAD USD/CHF AUD/USD NZD/USD USD/SEK GBP/SEK JPY/SEK CHF/SEK NOK/SEK USD/NOK USD/CNY 2 5 10 12 14 16 18 20 22 24 26 28 30 32 34 36 37 38 *Bloomberg survey FX forecasts. , SEB FX G10 Scorecard, Medium Term Fundamentals Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Risk appetite Weights USD EUR JPY GBP CAD AUD NZD CHF SEK NOK 25.0% 0.0% 17.5% 10.0% 15.0% 7.5% 10.0% 0.0% 10.0% 0.0% 5.0% +2 0 +2 0 -2 -1 +3 +4 0 0 -2 +1 0 -2 0 +1 0 -3 +2 0 -2 +2 +1 -1 -2 -1 +3 +1 0 +3 -3 0 +3 +2 0 +1 0 -1 0 0 +2 +1 0 -2 -1 0 0 -1 +2 0 -2 -1 +1 0 0 0 +1 -1 +1 0 0 -3 -3 0 0 -2 +1 -2 -1 -1 -2 0 -2 -3 0 0 -1 0 0 0 +2 -4 -1 -1 0 +1 0 0 +2 -1 -3 +1 +2 +2 -1 -3 +2 0 0 -2 0 0 +2 +3 0 -2 -4 -1 0 -2 +0.7 -0.1 +0.2 +0.5 -0.1 -0.4 -0.6 -0.3 +0.6 -0.3 Total weighted score G10 FX Scorecard - Contributions to total score SEK Weighted score: 0.6 NOK Weighted score: -0.3 Fundamentals Fundamentals Carry Carry Mon. policy Mon. policy Flows Flows Valuation Valuation Positioning Positioning Technicals Technicals Liquidity Liquidity Ec. Surprise Ec. Surprise Event risk Event risk Risk appetite Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 -0.8 -0.6 -0.4 -0.2 0.0 2 0.2 0.4 0.6 0.8 Currency Strategy USD Weighted score: 0.7 EUR Weighted score: -0.1 Fundamentals Fundamentals Carry Carry Mon. policy Mon. policy Flows Flows Valuation Valuation Positioning Positioning Technicals Technicals Liquidity Liquidity Ec. Surprise Ec. Surprise Event risk Event risk Risk appetite Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 JPY Weighted score: 0.2 GBP Weighted score: 0.5 Fundamentals Fundamentals Carry Carry Mon. policy Mon. policy Flows Flows Valuation Valuation Positioning Positioning Technicals Technicals Liquidity Liquidity Ec. Surprise Ec. Surprise Event risk Event risk Risk appetite Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 CHF Weighted score: -0.3 CAD Weighted score: -0.1 Fundamentals Fundamentals Carry Carry Mon. policy Mon. policy Flows Flows Valuation Valuation Positioning Positioning Technicals Technicals Liquidity Liquidity Ec. Surprise Ec. Surprise Event risk Event risk Risk appetite Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 NZD Weighted score: -0.6 AUD Weighted score: -0.4 Fundamentals Fundamentals Carry Carry Mon. policy Mon. policy Flows Flows Valuation Valuation Positioning Positioning Technicals Technicals Liquidity Liquidity Ec. Surprise Ec. Surprise Event risk Event risk Risk appetite Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 3 Currency Strategy 4 Currency Strategy China devalues making growth more decisive for FX markets now Several observers have described the trading pattern (particularly since the recent Chinese devaluation, see further below) as connected with the current account status: while some surplus countries have appreciated (EUR, SEK, JPY, CHF) deficit countries have given ground (USD, GBP and commodity currencies). Although an interesting thesis we have failed to find strong evidence this is the case. We therefore still regard the current account as less important for G10 countries. EM markets are different. Clearly, several less attractively valued current account deficit countries (including Turkey) have fallen back and remain vulnerable. For some time now we have expressed our support for a long USD position based on superior US growth, the anticipation tighter Fed monetary policy and (previously) a weak dollar. The flipside of a stronger USD is of course a falling euro, with euro-zone developments over the past 12-24 months causing the EUR to depreciate against the USD. However since Q2 this year, the USD has failed to outperform other G4 currencies. Instead, it has continued to strengthen against commodity currencies, and indeed almost all its emerging market counterparts. The narrow trade-weighted USD has remained rangebound while the broad-based USD has appreciated further. However, the current trend whereby overvalued currencies weaken has also highlighted another theme that China has become responsible for making more important: growth. CHINESE DEVALUTION PROVIDES A GROWTH SHOCK TO MARKETS Seen in retrospect the PBOC’s move on 11 Aug was perhaps not that surprising after all. In its article IV review of China published at the end of July, the IMF concluded that the Chinese renminbi was no longer overvalued, noting the “staff assessment that the substantial appreciation of the renminbi in REER terms this year has brought the exchange rate to a level that is no longer overvalued” (5.2% CAGR appreciation since 2005). Maintaining the USD peg intact caused the yuan to outperform all other EM currencies which are/were falling rapidly vs. the USD. In identifying FX market drivers, we have always regarded central bank policies as a key factor. Certainly, they continue to have a major impact on currency performance. However, more recently central banks have begun to react to the performance of their respective currencies, creating a feed-back loop between their own monetary policy stance and FX. This is hardly surprising as global disinflationary developments mean a weak currency is an easy way to achieve individual inflation targets. Consequently, the present currency war is less about traditional beggar-thy-neighbour policies (including competitive devaluations) and more about using the external channel to import inflation through a weaker exchange rate. Over the summer, aggressive central bank action appears to have played a less important role in predicting FX movements. Instead, our various scorecard components show valuation has been the best common denominator of FX performance. Exampling a few currencies helps explain developments. In particular, commodity currencies (especially NZD and AUD) have fallen back with our valuation models for both (kiwi in particular) still regarding them as expensive. The CHF has also fallen from an extreme to less extreme overvaluation. Meanwhile, the EUR and SEK have both performed well but remain undervalued (especially the SEK). Apart from deteriorating competitiveness many other explanations have been raised as reasons for the devaluation: 1) China looks to counteract Fed rate hikes and a stronger USD – we regard this explanation as improbable as markets have been discounting the stronger USD theme for a year now; and 2) Such a move has been regarded as pre-empting the IMF decision in November on whether or not to include the yuan in the SDR basket. Once again, this is not particularly reasonable as the IMF decision on SDR is 5 FX Ringside not based on its exchange rate level but rather on whether China is a major exporter and whether the currency is freely usable. China is a major factor in global trade and although the currency is not fully convertible it is definitely used globally as a means of payment. in long USD positions, and at least partly, the behaviour of reserve managers. The collapse in risk appetite and surge in volatility forced repatriation and unwinding of positions causing crowded long risk and long USD trades to become vulnerable. We do not expect the USD to be (that) positively correlated to risk appetite on a more lasting note. At the same time (and more importantly than either the Fed’s behaviour or the SDR question), despite the country’s still extremely large current account surplus, China’s FX reserves have begun to fall as capital leaves mainland China. During the past two years, FX reserves have decreased by USD 400bn. Partly this may reflect the valuation effect as the USD (and CNY) appreciates, although most comes from outflows. Some outflows may also result from the transfer of funds from the central bank’s balance sheet to strengthen the capital base of various policy banks and newly established international lenders programmes including the Asian Development Bank (which have received up to USD 100bn). Currency policies in the context of falling commodity prices and weaker global growth have made the USD more vulnerable. While official data is lagging, some reports for August suggests selling of US treasuries by various reserve manager accounts to support their own currencies. This highlights the dilemma facing the USD as still the largest component of global reserves. FED HIKING BUT CYCLE NOT THAT USD POSITIVE (BUT ECB POLICY STILL IS) SEB still expects the Fed to hike rates at its upcoming September meeting. Although the call is close we believe the domestic economy is sufficiently strong to raise rates above zero, with unemployment at 5.1% and tentative signs apparent of rising wage pressure (according to the Beige Book this situation is currently more broad-based). The US is also a relatively closed economy and the Fed is unlikely to react (yet) either to equity market falls or ongoing volatility unless the situation becomes more serious (i.e. if developments threaten growth). Inflation is still well short of its target (PCE core at 1.2% y/y), while lately broad-based inflation expectations have fallen. The trade-weighted USD is now also slightly overvalued. However, talk of a policy error to raise rates by 25bps to 0.25-0.50% is farfetched in our opinion. US financial conditions remain relatively loose and are expected to remain so. The Fed is fully aware of the ways in which financial market (herd) behaviour can amplify policy movements (through changes in interest rates and currencies). We therefore expect the rate decision in September will be accompanied by a very carefully worded dovish statement intended to calm markets. In other words, Fed policy will only be USD positive in the short-term, and more neutral as the central Capital outflows are large enough to have significantly impacted FX reserves, causing the flow outlook for the renminbi to have switched to negative from positive. As a managed float it is difficult to understand the policy choice made by the PBOC to intervene in the currency over a prolonged period to ensure its continued stability vs. an appreciating USD only to devalue it suddenly in three stages. In this regard, markets have made a clear interpretation: the issue is not about Fed policy or SDR inclusion but instead growth (and worries China is growing much slower than expected). We have raised our USD/CNY forecasts to 6.60 and 6.70 end-2015 and end-2016 respectively. China’s currency devaluation revealed some unusual correlations with the USD depreciating substantially as risk was sold-off. However, this trading pattern was instead a consequence of a speculative position build-up 6 FX Ringside bank at most delivers what markets already discount. Regardless of whether or not the Fed hikes, monetary policy divergence remains a relative theme, since the ECB is close to increasing/broadening the rate of asset purchases. Inflation will continue to undershoot the ECB target. Euro flows have stabilised, while the current account provides support approaching 3%/GDP. However, reserve managers continue to divest out of European denominated fixed income holdings. Despite the “solution” of the Greek situation, political risks clearly remain. The euro is also not cheap (our index, page 11 shows it trading close to neutral level). With falling commodity prices, this highlights the risks for the ECB. Risk aversion may well bring EUR/USD back to 1.15 as long USD positions unwind further. But the Fed th rate hike on sept 17 EUR/USD is a short-term USD positive. We see two factors explaining why the correlation between risk appetite and currencies has resumed. Firstly, for over a year, currencies have reacted strongly to expectations regarding monetary policy. For example, the dollar has strengthened due to expectations of divergent monetary policy between the ECB and Fed. With markets more stressed, it is fairly natural that reduced tightening expectations are negative for the dollar. Moreover this force will be even more powerful regarding market positioning, with the speculative community being net long the dollar. SEBEER Long-term fair value, EUR Index 120 115 110 105 100 95 90 85 80 75 70 As correlations between exchange rates and general risk appetite have returned it once again becomes increasingly important to have an opinion on the outlook for market risk sentiment going forward. NOKSEK: A SUSTAINED BREAK BELOW PARITY Macro accounts continue to be surprised by downward pressure on the scandi cross, which for a long time has been favoured topside based on petroleum wealth in Norway vs. Sweden’s traditional manufacturing industry base, which is geared towards a weak Europe. However, the trend remains negative as terms of trade developments and the relative growth outlook favour the SEK over the NOK, despite the Riksbank’s highly expansive monetary policy. It is too early to conclude that Norwegian growth has bottomed based on falling oil prices, as leading indicators continue to signal a bleak(er) outlook. In nominal terms, NOK is weak with several real effective exchange rate series pointing in the same direction. For valuation to start to kick-in oil prices must stabilise and Norges Bank must also refrain from cutting rates. It is too early to dismiss such risks. Regarding the SEK, we still expect the trade-weighted krona to bottom out. Based on our FX Scorecard most factors continue to suggest a positive outlook. Should global growth deteriorate or Swedish inflation disappoint during the fall (the most likely negative SEK factor), our high SEK ranking would prove too optimistic. Nevertheless, we expect NOK/SEK to trade below parity during the fall/winter. 2001 2003 2005 2007 2009 2011 2013 2015 EUR Long-term Fair value CHANGES IN RISK APPETITE INFLUENCE CURRENCIES AGAIN. In mid-2012 we observed how the previously strong correlation between market risk appetite and currencies had broken down almost completely. Subsequently, currencies have basically been unaffected by fluctuations in risk appetite. However, more recently we have seen how they have again reacted because of variations in risk appetite, although relationships have changed for some currencies. For example, the traditionally negative correlation between the USD and risk appetite has altered its sign completely, with the dollar currently tending to weaken with lower risk appetite, causing it to behave much as commodity currencies like the AUD and NZD have usually behaved. As well as the USD, a normally uncorrelated currency like the GBP has also begun to trade positively with increased risk appetite. By contrast, the JPY and EUR have both shown negative correlations with risk appetite and tend to benefit from set-backs in risk appetite. 7 FX Ringside Negative performance basically concerned the EUR, NOK and CAD. NOK and CAD, both commodity currencies, depreciated further due to the lower oil price and monetary policy easing, while the euro has continued to recover against most currencies since the large sell-off in Q1. THE UPDATED FX SCORECARD In the FX Scorecard we take into account the relative importance of various categories by the weight we attach to each category to best reflect our expectations. For a long time monetary policy has been the key factor for exchange rates. We still believe relative monetary policy and the outlook for growth will remain important factors for the currency market over the next 3-6 months, although they will not be the most important. We have therefore lowered the weight for monetary policy expectations in the scorecard to 17.5% (25%). We do so because monetary policy has reached its outer bound (ECB, BOJ, Riksbank) and because further policy easing by any of these institutions is unlikely to have any material impact on currencies going forward. Instead we have increased the importance of “Fundamentals” to 25% (15%), particularly the outlook for growth and (to a lesser extent) the terms-oftrade situation. FX SCORECARD PERFORMANCE SINCE MAY. For almost two years we have favoured being long the USD although our scorecard approach has also suggested long euro exposures a few times. Our core views of a stronger dollar and weak euro have been important contributors to our portfolio return since May 2014. The last scorecard update was in May 2015. Once again the USD was one of the best performers, this time in a split lead with the GBP. Other currencies supposed to outperform according to our framework include the SEK, NOK and CAD. Underperformers included various currencies affected by monetary policy easing (EUR, JPY) and commodity currencies (AUD, NZD). Moreover the weight attached to the Economic surprise index reflecting potential surprises in data remains at 10% as in May, further underlining the importance for currencies of support from a strong growth outlook. With valuation being an important driver for currencies in recent months according to our evaluation, we have increased its weight in the scorecard to 15% (10%) making it a key driver. Compared to May, we have also changed drivers as the correlation between exchange rates and risk appetite has resumed. We have therefore raised the weight related to risk appetite to 5% (0%) in order to capture its increased importance for the currency market. Since 27 May, when it was last rebalanced, the scorecard basket has generated a return of 0.4% (27 May) including carry. Between 5 Aug and 28 Aug, the Scorecard portfolio index lost 1.6%. This reflected decreased global risk appetite following China’s devaluation of the CNY, and also the fall in equities which weakened the USD and GBP while strengthening the EUR and JPY. One might probably argue that a 5% risk appetite weighting is too low considering that periodically it has been almost the only currency driver. We have kept it reasonably low as we still expect fairly strong growth in both the US and euro area in H2 2015 and 2016, which should eventually be positive for risk appetite. Current uncertainty regarding global growth and particularly the situation in China has increased in recent weeks and it is difficult to say for how long it will continue. In addition, a potential lift-off by the Fed at one of its upcoming meetings could increase uncertainty and market volatility and hurt risk appetite further. In other words, there will probably be further periods of temporarily increased stress when lower risk appetite becomes the main driver for currencies followed by rebounds. If the positive performance of the FX Scorecard index at the beginning of the year was broad-based, it has been the complete opposite since the portfolio was rebalanced in late May. Most positive performance since May has been attributable to the weak AUD, which generated a positive return of 1.75%. Moreover, depreciation of the NZD and CHF had a positive impact on performance. Given its high score the USD receives 33% weight in our new Scorecard portfolio followed by the SEK (32%) and GBP (25%). The strategy also recommends long 8 FX Ringside positions for the JPY 10%. Currencies with the largest short exposures include the NZD (31%), AUD (22%) and NOK (19%). The following portfolio represents the FX Scorecard Currency Strategy update: 9 Currency Strategy The outlook for the dollar very much depends on the actions of the Fed. However, the recovery has been weaker than expected so far this year. Any signs that the economy is picking up would make it easier for the Fed to raise rates in September, a key factor for our positive dollar outlook. A different scenario where the bank postpones tightening would produce a very different dollar scenario. ECONOMIC FUNDAMENTALS Despite a recovery in Q2 (3.7% q/q ar) driven by a recovery in household spending (weak in Q1), US growth was only satisfactory during the first half of 2015. While the lower oil price is widely assumed to be net positive for the US economy by benefiting consumers, the initial effect of the price slump was negative as it slowed investments in the oil sector. Moreover the USD’s rapid appreciation in Q1 probably hurt the export sector. Despite mixed growth-related data over the summer, overall it signals that economic expansion will pick-up in H2. Business sentiment within the manufacturing sector, which fell before the summer, has stabilized at just over 50, while service sector sentiment scored 60.3 in July (eased a tad to 59 in August) - levels not seen since 2005/2006. Consumer sentiment has also improved, which should benefit household spending going forward. Positively, the housing market continues to improve as demand for homes picks up. Indeed it should result in rising house prices and acceleration in housing construction. The labour market has also provided good news, with employment continuing to increase each month by around 240,000 and unemployment set to decline further, soon falling below 5% where wage growth can be expected to +2 accelerate. MONETARY POLICY Since last year, the case for a stronger dollar has been based on expectations that US monetary policy and that of the rest of the world, particularly the euro area, would diverge. We still expect the Fed to start tightening policy, with a first rate hike this month. However, low inflation due to further downside pressure from falling fuel prices and slow wage growth will slow the Fed’s tightening of monetary policy. Now we expect only one rate hike this year followed by a cautious approach to 2016 also, with the Fed fund target rate reaching 1.25% by the end of 2016. Although monetary policy remains positive for the dollar, it will be less supportive than we expected over the next six months. +2 FLOWS With US growth stronger than in other countries, the country’s imports are rising rapidly, hurting its trade balance. In Q1 the current account deficit widened to 2.6% of GDP after improving continuously since 2011. Most likely the trade deficit will continue to widen going forward as we expect US domestic demand to remain the key driver for growth. Portfolio-related capital flows such as foreign purchases of US long-term securities are USD-positive. In addition we expect that the Fed begins to tighten its monetary policy later this year. Higher US interest rates would probably attract foreign capital. Overall, flows are neutral to slightly positive for the dollar. 0 10 USD Weighted score: 0.7 Fundamentals Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Risk appetite -0.8 E-0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 U R speculative positio ns 1.35 0 U S D /C A D E U R /U S D 12 5 10 0 1.30 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) US dollar 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy SEBEER Long-term fair value, USD Index US dollar 135 POSITIONING Speculative accounts are long USD and have so been since May 2014. However, in the beginning of 2015, speculators scaled down their record long USD position, but as the oil price resumed falling and the US economy seemed to come out of the Q1 slump this summer, they began to add to their net long USD position once more. This however came to a swift halt mid-August and the past two weekly reports on positioning have shown that specs have sharply scaled down their net long position again. It is this negative USD sentiment that provides the current modest negative positioning score. -1 TECHNICALS A correctional three-wave structure seems to have been completed, confirming strong support in the yearly moving average band (93.50/91.70). A bullish short-term print was added last month, but extension over 98.30 is needed for full confirmation and re-entry into the backdrop uptrend with a long-term Fibo target looming at 103.30 once 100.20 is taken out. +3 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE With its superior liquidity the USD has traditionally been seen as a typical safe haven currency which is negatively correlated with risk appetite. However since 2012 these relationships between currencies and risk appetite have disappeared and that goes for the USD as well. More recently it has actually been the other way around and currently the USD seems to be hurt against funding currencies like the EUR and the JPY when financial markets come under increased stress. Another reason is probably that the outlook for the USD is closely related to monetary policy and the timing and pace of coming rate hikes by the Fed, which probably enforces the positive relationship between the dollar and risk appetite. Based on the rate differential between the euro area and the US there should be potential for some further appreciation of the USD. 11 125 115 105 95 85 75 2001 2003 2005 2007 2009 2011 2013 2015 USD Long-term Fair value E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) VALUATION Our internal long-term fair value model, SEBEER, indicates the USD trade weighted index probably has been undervalued since 2003. It appears the general dollar depreciation coincided with the introduction of the euro in 2002 and its reputation as an alternative global reserve currency. However, superior US growth and expectations of widening rate differentials have triggered a recovery for the USD since May 2014. Our internal valuation model as well as the real effective exchange rate, indicate the USD now trades on the rich side of its long-term fair value. However, it is still far from stretched territory where valuation would become a drag on the USD. -2 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have view: to be reduced. Technical USD INDEX Currency Strategy The euro EUR Weighted score: -0.1 The euro performs reasonably well at the moment. Neither the Greek crisis nor the increased likelihood of Fed rate hikes have been sufficient to put downward pressure on the currency. In addition, verbal interventions fell silent in past weeks, indicating that law makers and central bankers see no need for an even weaker currency. Looking ahead however, it is increasingly likely that ECB has to increase its efforts if economic developments should disappoint. Risks to the currency are still skewed to the downside. Fundamentals ECONOMIC FUNDAMENTALS The economy grew by 0.3 percent in q2 2015 after 0.4 percent in q1. The recovery has failed to gather additional momentum and remains uneven across the monetary union. While Spain, Ireland and Germany are doing well, the heavyweights France and Italy are lagging behind. Unemployment fell to 10.9% in July but remained unacceptably high. In the second half of 2015, the very accommodative monetary conditions as well as the tailwinds from lower commodity prices and the depreciation of the euro should lead to a gradual strengthening of the recovery. We expect the economy to expand by 1.6 per cent and 2.1 per cent in 2015 and 2016 resp. While the overall budget deficit will continue falling 2015 and 2016, consolidation needs in several member states continue to be high thus setting narrow limits to any fiscal stimulus. +1 Event risk MONETARY POLICY After having deployed most of its available instruments the ECB wants to keep a steady hand in coming months. The expansionary monetary policy is slowly finding its way into the real economy, resulting in very favourable financing conditions for private households and firms. At various occasions the Governing Council has stressed that all non-standardized measures will be fully implemented. Therefore, asset purchases will run until at least September 2016, or longer if necessary. At the September meeting, updated ECB staff macroeconomic projections showed a slowly strengthening economic recovery. Due to the latest decline in commodity prices inflation projections was cut indicating that it will take until 2018 before the HICP rate will be close to the ECB’s target of close, but below, 2%. The ECB’s monetary policy will remain very loose/looser for a long time to go and clearly euro negative. -2 FLOWS In the period ending in June 2015 the 12-month cumulated current account surplus rose to €265.5bn or 2.6% of GDP, compared with a surplus of €177bn for the twelve months to June 2014. The surplus in the current account has been matched by similar sized outflows. Combined direct and portfolio investments of euro area based investors reached €807bn, surpassing those investments of foreigners in the euro area by €271bn. Looking ahead, no change in trend is visible in the current account. Therefore, it looks increasingly likely that the surplus will rise close to 3% of GDP until the end of 2015, indicating that the euro is already undervalued at current levels. -1 12 Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Risk appetite E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy SEBEER Long-term fair value, EUR Index VALUATION. Until the euro started to depreciate a year ago it was overvalued in trade weighted terms according to the SEBEER long-term fair value model. The depreciation following further easing by ECB and a generally stronger dollar has brought it very close to the estimated long-term fair value. Other measures of valuation as the real effective exchange rate for the euro suggest a similar situation, with the euro being quite close to its historical average and if anything slightly +1 undervalued. POSITIONING Speculators are net short EUR vs. USD but to a far less extent than what has been customary over the past year. The record short position, from end of Mar 2015, has been significantly scaled down, probably as the threat to the EUR from the Greek crisis abated. The current positioning score is neutral and is reflecting that short positioning no longer is an excess and that downscaling it (showing positive EUR sentiment) has been too slow to generate a positive score. 0 TECHNICALS Dynamic resistance at the yearly moving average band seems to hold and the move up from the 94.00 low looks medium-term correctional. Loss of support at a 95.40 "B-wave low" is however needed for full confirmation and a “promise” of fresh lows (>94.00) in the making. -3 LIQUIDITY, EVENT RISKS, GLOBAL CYCLE. Due to the third bailout package, Greece is of no interest anymore at the markets at the moment. The ECB bond purchases will continue at a monthly clip of €60bn at least until September 2016, and longer if necessary. No early tapering of these purchases looks likely at the moment. Focus will be back on economic fundamental data. Downside risks have increased due to slower growth in many emerging markets. In autumn, general elections will take place in Portugal and Spain which could lead to changes in government and to a strengthening of antieuro forces. 13 120 115 110 105 100 95 90 85 80 75 70 2001 2003 2005 2007 2009 2011 2013 2015 EUR Long-term Fair value E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) The euro 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative Technical view: ECB EUR index longs will have to be reduced. Currency Strategy Japanese yen JPY Weighted score: 0.2 The JPY continues to be stuck around 120. We expect JPY weakness to continue vs USD towards 130 but we would need to see another round of QE by Bank of Japan or a Fed rate hike to break out of current range. SEB’s view is for the US to start hiking in 2015 and for the BoJ to launch another round of QE in the October policy meeting. The economy remains too weak to increase inflation and BoJ will have to act. A Fed and/or BoJ event will act as a catalyst to break 125 and reach 130. Fundamentals Carry Mon. policy Flows Valuation Positioning Technicals Liquidity ECONOMIC FUNDAMENTALS The economy is gaining MONETARY POLICY BoJ is facing difficulties in reaching the “2% inflation in 2 years” promise and have pushed it back to 2% by FY2016. Even with the delay, we feel that the target will be difficult to meet with current inflation rate at 0% and lower oil prices. Japan will also be heavily influenced by China exporting deflation with a weaker RMB. To hit the 2% target, we think BoJ will announce another round of Quantitative Easing (QE) towards October where they will likely quadruple the size of the monetary base. And similar to the last 2 QEs, we will not get any warning from the BoJ about another stimulus. October is the likely timeframe since it will see that inflation expectations released on the Oct 2 Tankan -2 survey will show a fall, following headline inflation. FLOWS. Capital flows: equity has finally turned outwards to support Yen weakness. We’ll likely see debt and speculative flows turn out also as soon as we get more clarity from the Fed. However, going forward now the current account is returning to a surplus from lower oil prices. Restart of nuclear power plants will also slow imports of coal further. It is too early but if we get current account surplus and Japan reaching the 2% inflation target (meaning monetary loosening ends) the Yen weakness will become capped. -1 Ec. Surprise Event risk Risk appetite U R speculative positio ns -0.8 E-0.6 -0.4 US D /C-0.2 A D 0.0 0.2 0.4 0.6 0.8 10 0 1.30 0 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 75 Real GDP % y/y 5Forecast 0 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 4 % yoy ex VAT CPI ex fresh food 3 BoJ Forecast Import Price %yoy (RHS) 40 30 2 20 1 10 0 0 -1 -10 -2 -20 -3 -30 -4 -40 09 10 11 12 13 14 15 16 Japan BOP 12 month rollin sum as % of GDP 6 4 2 0 -2 Current Account Equity Inv Other Inv -4 -6 11 14 12 5 E U R /U S D 1.35 0 Contracts (thousands) momentum after registering a recession from VAT tax hike in April 2014. Prime Minister Abe has also passed a stimulus package worth 0.7% of GDP and cut the corporate tax rate by 2.5 percentage points to 32.11% from April 2015. The administration plans to continue lowering the tax rate over about five years to below 30%. Consumption has also picked up post VAT hike. Japan’s growth should rebound to 0.8% in 2015 from -0.1% in 2014. Also, Abenomics is starting to gain traction where corporates are starting to deploy the cash by investing in capex and hiking wages. However, the key issue is that growth is too slow for inflation pressures to rise and hit BoJ’s 2% target. +1 12 13 FDI Debt Inv 14 15 Currency Strategy SEBEER Long-term fair value, JPY Index Japanese yen moved JPY valuation into a stretch on the downside. From previously being extremely overvalued prior to the correction our own SEBEER model now place the JPY among the cheapest G10 currencies. Similarly the longterm real effective exchange rate is currently far below the historical average (more than 1.5 standard deviations). Altogether it is difficult to come to any other conclusion than the yen currently is undervalued and likely to move higher if the weak economy improves and the BOJ indicates they will end bond purchases. +4 145 135 125 115 105 95 85 2001 2003 2005 2007 2009 2011 2013 2015 JPY POSITIONING Speculative accounts are net short JPY vs. USD as they have been since Oct 2012. Between January and May 2015 the short position was almost erased only to quickly be build up again. Since then positioning has been choppy and currently a quite large net short position is rapidly being downscaled which renders the positive positioning score for JPY. +1 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 10 0 50 25 1.20 0 more fuel to burn short- medium-term and 129.60\80 would become exposed if when nearby resistance at 127.40\128.20 is taken out. To think less of the yen again, support at 122.40 must be given up again. 0 1.15 0 15 12 5 75 1.25 0 TECHNICALS Even if it is “just a correction” higher, it has LIQUIDITY, EVENT RISK AND GLOBAL CYCLE There are several risks to Japan in this category. On liquidity, too much liquidity has made short term yields in Japan turn negative and mass BoJ purchases of JGBs are reducing activity. These conditions are fine in normal markets but in times of shock, it leads to sudden movements that can be negative for Japan. Also, short Yen is still a consensus trade and along with long Nikkei. The long Nikkei positions are mostly hedged by short Yen position so in a risk off event, Yen will still strengthen. The key event risk is Bank of Japan policy meeting. The Tankan survey result in October is likely to be the trigger and show lower inflationary expectations in line with falling headline inflation. We see another round of QE by BoJ in October. Long-term Fair value 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) VALUATION The rapid depreciation since Q4 2012 has 07 The lack of significant upside progress in EUR/USD makes the current substantial net Technical view: BOE JPY index Should long speculative position a burden. the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy British pound sterling GBP Weighted score: 0.5 ECONOMIC FUNDAMENTALS After disappointing in Q1, growth accelerated in Q2. Since the recovery began in 2013, household spending has been the key driver for UK growth and is likely to remain so going forward. So far, rises in household income have been small so spending increases have reduced household savings in recent years. Household sentiment remains close to record high levels supported by further improvements in the labour market. Since 2012 unemployment has fallen from 8.5% to 5.6% in May. As slack in the labour market has been eroded wage growth has finally picked up this year but from very low levels. In May earnings rose by almost 3% y/y. Business sentiment is somewhat mixed with the PMI for the manufacturing sector declining, while service sector sentiment has stabilized at an expansionary level. Regarding the historical relationship, sentiment indicators suggest that annual GDP growth should remain around 3% in coming quarters. SEB forecasts growth of 2.7% in 2015 and 2.5% in 2016. +2 MONETARY POLICY The BOE has kept the Bank Rate unchanged at 0.5% for several years. Like the rest of the world, lower fuel prices combined with a stronger currency have exerted significant downward pressure on prices with headline inflation now close to 0%. However, towards the end of the year we expect inflation to increase as base effects from last year’s fall in fuel prices fade. Still, inflation will remain muted and most likely stay below the 2% target for several years. More recently wage growth has accelerated as labour market conditions have tightened. This could signal that domestic cost pressure has begun to rise although it may partly be offset by productivity improvements. One BOE member voted to hike the Bank Rate by 25bps at the August meeting, while several others regarded the decision as finely balanced. Obviously low inflation is not enough to restrain them, although any tightening will be very gradual to allow the economy to adjust to rising interest rates. We expect the first rate hike in Feb 2016, a view not yet fully discounted in prices. +1 FLOWS The UK trade balance has improved slightly since 2013, although not enough to reduce the current account balance, which posted a record deficit of almost 6% of GDP in Q1. Much of the rise can be explained by the income balance switching from surplus to deficit in recent years. However, large portfolio inflows more than fully offset the current account deficit. 0 16 Fundamentals Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) We have been positive on the GBP for some time as the economy has recovered strongly and the labour market has improved. We still expect the BOE to be one of the front runners when monetary policy tightening begins. With the economy firmer, the GBP has appreciated to stand currently probably slightly overvalued in trade weighted terms. Still, we expect strong fundamentals and tighter monetary policy to continue to support the GBP. 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy SEBEER Long-term fair value, GBP Index VALUATION The broad GBP appreciation since 2013 and a weaker euro have moved the trade weighted GBP-index well beyond the long-term fair value according to the SEBEER-model. However, the stretch is by no means extreme. Moreover the real effective exchange rate has reached above the historical average confirming the pound probably is slightly overvalued. Still valuation is not exaggerated and therefore unlikely to trigger a move in the GBP. -1 POSITIONING Speculators just switched from a net short position (held since October 2014) into a small net long position. Even if the trend supports GBP, it is not strong enough to render a positive positioning score. On the other hand most of 2014 specs held a quite large net long GBP position, why the current net long is far from excessive and thus no negative score is either applicable 0 for GBP at the moment. TECHNICALS The pound fell out of bed last month while bearishly breaking below a trend-ending “Wedge”. This ups pressure on medium-term dynamic supports. The 21week exponentially weighted moving average band is already broken and the yearly moving average band (90.80/89.70 is also exposed with a target for the move at 88.90. 0 EVENT RISK, LIQUIDITY AND GLOBAL CYCLE Traditionally changes in the sterling exchange rate have been almost uncorrelated with global risk sentiment. However, in recent months there appear to be a small positive correlation which indicates we should expect the GBP to weaken on the back of lower risk appetite. The outlook for the GBP is closely related to the outlook for the UK economy and the probability for monetary policy tightening by the BOE. However, low inflation has clearly delayed any action from the BOE until 2016 at the earliest. With domestic demand being the main driver for growth the largest risk related to our cautious outlook for the GBP probably is changes in expectations on BOE policy, which could take the GBP in both directions from where it trades today. a 17 115 110 105 100 95 90 85 80 75 70 2001 2003 2005 2007 2009 2011 2013 2015 GBP Long-term Fair value E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) British pound sterling 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Technical view: BOE GBP index Currency Strategy Canadian dollar CAD Weighted score: -0.1 ECONOMIC FUNDAMENTALS The Canadian economy contracted in Q1 by 0.8% q/q AR and by 0.5% in Q2 which leaves Canada in technical recession. The contraction is however mild compared to previous recessions and the unemployment rate (6.8% in July down from 7.0% a year ago) also indicates that there is no broad-based slump in the economy. Already in Q3 the recovery in the US, Canada’s main trading partner, is expected to push the economy back into growth (BOC expects GDP at 1.5% in Q3). GDP details, such as increasing household spending and expansion by industries other than in the resource sector, support such expectations. Also the fact that GDP on a monthly basis expanded for the first time in six months in June (0.5%) points towards that the worst is behind. -1 MONETARY POLICY After keeping its policy rate at 1% for over four years, BOC has cut rates twice this year (January and July) to mitigate the adverse financial effects on the economy from falling oil prices. The BOC is data dependent and to maximise clarity, on May 19, Governor Poloz stated the five factors most closely followed by the bank: (1) oil prices, (2) CAD, (3) non-energy goods exports (and tourism), (4) corporate investments, and (5) employment. Both cuts have come after sharp falls in the oil price hence that seems to be key in the reaction function for BOC. Even though oil prices are lower than what assumed by BOC in their July MPR (Brent oil to trade at $65/barrel) a fall below the yearly low in March is probably needed to trigger further rate cuts, especially given that the economy seems to have turned for the better along with BOC’s expectations. Currently, inflation is not in focus for the bank; albeit close to the lower confidence interval it is expected to rebound to the target 0 inflation rate of 2% in 2016. FLOWS Weak competitiveness and poor US demand for Canadian exports have caused deficits since early 2009. With the oil price sharply lower a record high goods trade deficit of 3.4bn was posted in May. On a positive note it narrowed significantly already in June (to -0.8bn) and July (-0.6bn) and exports grew with a promising 6.3%. In Q1 foreigners invested largely in Canadian securities while Canadians sold foreign securities leading to the largest quarterly inflow of funds since 2005, which offset the negative current account. However in Q2 there has been a small outflow of funds which in combination with the -1 trade deficit is negative for CAD. 18 Fundamentals Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) The Canadian central bank (BOC) has cut the rate twice this year down to 0.5% after keeping it at 1.0% since 2010. The easing in financial conditions were attempted to mitigate negative effects on the economy from the oil price shock. Q2 GDP numbers released September 1 confirmed that Canada is in a mild recession. However, we expect the economy to rebound already in Q3 as the improving US economy should further improve Canadian net exports and investments. We expect CAD to outperform the other commodity currencies mainly due to its extensive connections to the relatively strong US economy. 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy SEBEER Long-term fair value, CAD Index VALUATION The Canadian dollar has traded at rich levels for a long time, which indisputably has been negative for the countries competitiveness. Two rate cuts by the BOC and sharply lower oil prices, the currency has weakened and currently trades below its long-term fair value in trade weighted terms. The real effective exchange rate is, however, close to the long-term average. As the currency trades on the cheap side of its long-term fair value, valuation has shifted from previously being a negative factor for the CAD and today we would instead expect it to strengthen in the longer term. +1 120 115 110 105 100 95 90 85 80 75 70 2001 2003 2005 2007 2009 2011 2013 2015 CAD POSITIONING Speculative accounts are massively net short CAD vs. USD. The position has been built during summer when oil prices began falling again and BOC cut rates a second time in 2015. At the same time the US economy began to recover and markets increased the probability of an autumn Fed hike. In mid-August specs began correcting their excessive short position bringing it th th from the 4 3-year percentile to its 12 and thus the most pressing correction has already occurred why the positioning score is neutral in the scorecard. 0 TECHNICALS All medium-term trend-identifiers point boldly lower, but conditions in this timeframe perspective are stretch (as can be seen through the low clustered medium-term multi-stochastics and by the sheer distance to a ½-year average. This calls for a short-term correction higher to close back in on descending dynamic resistance, now at 91.80\92.70. -2 EVENT RISK, LIQUIDITY AND GLOBAL CYCLE Historically the Canadian dollar has correlated positively with general risk appetite and the performance of the US equity market. Lately however it is foremost the oil price that dictates the development of CAD. RBA’s favoured fair value model for AUD seems to work well also for the CAD which isn’t very surprising as the both are commodity related currencies. The fair-value is based on terms of trade, relative real rate spread versus US, Europe and Japan. Terms of trade and CAD have generally fallen since 2011 but the pace increased greatly from mid-2014 when oil prices tumbled. March to May oil prices corrected, USD generally weakened and the model as well as CAD headed higher. However, oil prices has fallen in June and July and BOC cut the rate in July making both CAD and its fair value falling sharply again. 19 Long-term Fair value E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) Canadian dollar 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Technical view: BOE CAD index Currency Strategy Australian dollar AUD Weighted score: -0.4 ECONOMIC FUNDAMENTALS Overall the Australian economy is performing satisfactorily, despite several pockets of weakness. According to the consensus forecast, GDP is expected to grow by 2.3% this year and 2.7% in 2016, which is around trend. Net exports and household spending are the largest contributors to growth, while capital spending is subdued. In particular, mining investments continue to decline although nonmining investments also remain sluggish. Threats to the economy are obvious with a continued slump in commodity prices and economic weakness in China the greatest risks. Nevertheless, the AUD has already weakened substantially because of such uncertainty. In trade weighted terms “the aussie” has depreciated by more than 14% over the last 12 months providing some support for exports. The labour market has stabilized after previous weakness with unemployment around 6.06.5% since mid-2014, although it rose sharply in August as participation increased. Going forward, it is expected to remain stable. Consumption growth has picked up supported by falling interest rates, rising house prices (in some regions) and a lower savings rate. 0 MONETARY POLICY The RBA reduced the cash rate by 25bps in Feb and again in May to stand currently at 2.0%. Headline inflation was only 1.5% in Q2, partly due to falling fuel prices, while core inflation was at the lower end of the target range at 2.0%. AUD depreciation probably helps exert some upward pressure on import prices. However, since cost pressures within the economy remain muted with low wage growth and unit labour costs having declined for three consecutive quarters, there is probably room to lower rates further if commodity prices continue to fall or if demand from China remains weak. We expect the RBA to cut by 25 bps to 1.75% at its Oct meeting and to remain on hold in 2016. Current market pricing discounts a 45% probability of two rate cuts to 1.50% within the next six months. While slightly more aggressive than we expect, the monetary policy score remains slightly negative. -1 FLOWS In recent quarters, the current account deficit decreased to 2.7% of GDP in Q1 2015, due to stronger net exports and improving net investment income flows. However, the deficit is more than fully offset by net portfolio inflows related to debt securities and equities, and by direct investments. The broad basic balance, representing the current account balance and net portfolio flows, amounted to 3% of GDP in Q1. +1 20 Fundamentals Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) The AUD has depreciated by more than 14% in trade weighted terms over the last 12 months. After being substantially overvalued, we regard the currency as now fairly valued. The Australian economy is performing reasonably well at present. It is expected to grow at around trend in coming years, although low inflation, falling commodity prices and weakness in China suggest the RBA may cut rates again. While we do not expect the AUD to weaken much further, downside pressure remains. 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy SEBEER Long-term fair value, AUD Index Australian dollar 135 POSITIONING Speculative accounts have since the beginning of June built up a net short position which is getting close to the extreme short levels seen in March, just before the general USD correction made the AUD sentiment temporarily positive. Currently the net short positioning is far from excessive and a correction is therefore not expected. On the other hand, besides last week, specs have been hesitant to add to their already pronounced short positions. All in all this renders a neutral positioning score. 0 125 115 105 95 85 75 2001 2003 2005 2007 2009 2011 2013 2015 AUD Long-term Fair value E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) VALUATION We have re-estimated our long-term fair value model resulting in a reduced fair value estimate for the AUD trade weighted index. Lower commodity prices have reduced terms of trade significantly from its highs a couple of years ago, which is a key factor for the revision of our estimate. Similarly lower commodity prices explain why the RBA has been rather explicit about the aussie overvaluation. Just recently the AUD basically reached our long-term fair value estimate for the first time since 2010, which means that it probably is fairly valued today. In contrast the real effective exchange rate indicates the AUD still trades on the expensive side of its long-term average. Altogether we consider the AUD quite properly valued where it trades today. Further deterioration in terms-of-trade or lower interest rates in Australia should add further downside pressure on the AUD though. 0 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. TECHNICALS All medium-term trend-identifiers point fiercely lower, but in the weeklies there is now a large gap (92.10-90.10) which brought the index into a deep overstretch. The distance to the ½-year average is notable and momentum indicators are lean. All this calls for a correction higher, at least back to the +92s before -2 selling may resume. EVENT RISK, LIQUIDITY AND GLOBAL CYCLE In a low yield environment Australian interest rates probably are high enough to attract capital inflows. Previously, much of the support for the AUD was related to high commodity prices attracting foreign capital to the mining sector. Falling commodity prices have been particularly bad for the AUD. As the likelihood of a recovery in commodity prices seems low this obstacle for the AUD is likely to persist. Currently the market discounts a positive probability for further rate cuts from the RBA, not the least since the situation in China has worsened. We expect the RBA to reduce its key rate again in October, which should weigh on the currency. Therefore declining commodity prices and additional easing are the main drivers for a weaker AUD. 21 Technical view: BOE AUD INDEX Currency Strategy Even though New Zealand still is one of the best, performing economies in the developed world, there are some dark clouds gathering. The 2015 GDP will miss the previously estimated 3 percent and this is mainly due to weak dairy markets and an earlier than expected Canterbury rebuild. The low inflation is also causing headaches to the RBNZ, which already has responded by twice cutting the OCR by 0.25% to 3%. The NZD has accordingly also taken a beating (the NZD index is down almost 17% since April), something that will, at least temporary, lift inflation. On the positive side high immigration and a still very positive Terms of Trade (ToT) can be found. Both RBNZ as well as the government will impose new macro prudential measures in October in an attempt to curb the running house price inflation in Auckland (24% y/y). ECONOMIC FUNDAMENTALS There’s still, but less pronounced, divergence between the domestic and the international economy. The NZ economy is still doing well but is facing increasing headwinds. Of particular concern is the low dairy prices (which we expect to stabilize soon), the slowdown in China and the weakness in Australia. PMI’s are falling but all remain in expansionary territory. The Canterbury rebuild (residential) is coming to an end but capacity should be relocated to the overheating Auckland area (building activity value during Q2 reached a 50year high). The labour market remains strong with employment at record levels and unemployment (5.9%) only a tad above last year’s multiyear low. Still high net immigration continues to be a main factor in pushing house prices in Auckland even higher. +1 MONETARY POLICY The RBNZ has cut its OCR to 3% from 3.50% during the past months and is signalling that there is more to come (market pricing currently indicates a further 50bps reduction in the coming six months). Inflation currently stands at 0.3% which is well below the Bank’s 1-3% target zone. Short term we will see a small pickup in inflation given the rapid decline of the NZD, but given the recent decline in oil prices the effect will probably be temporary. RBNZ is expected to cut its OCR -1 by another 25bps on Sept 10. FLOWS After having deteriorated since 2014, the terms of trade has again started to show a positive development. The outlook for the C/A deficit has on the other hand worsened some from previously expected -3.3% to the current estimate, -3.6%. The net external debt continues to increase as domestic lending at a large extent is financed overseas. Canterbury earthquake overseas reinsurance claims continues to decline and now only NZD3.8 bn (of the original NZD16.4bn) remain unsettled. However at the current pace, approximately NZD 0.5 bn per quarter, the impact on the currency is limited. Foreign holdings of NZ government debt remain -1 unchanged at ~70%. 22 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) New Zealand dollar 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy New Zealand dollar POSITIONING An excessively net short NZD vs. USD position held by speculators has been scaled down significantly since mid-July. Specs are still bearish NZD but the extreme level has been corrected and a more balanced positioning should be possible during coming months. As there is no more correction pressure from an excessively negative NZD positioning nor a strong enough trend for less short positioning the positioning score is currently neutral. 0 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE Global growth continues to be sub-trend. Chinese growth is being scrutinized and even more so after the recent devaluation of the CNY. A more pronounced Chinese slowdown will not only have directly negative effects to the NZ economy but also indirect ones such as a possible more pronounced Australian slowdown (underpinned by a continued fall in particular in metals prices). The runaway housing (+25% y/y) market in Auckland imposes a rapidly rising risk to the NZ economy. The DTI (debt to income ratio) is rising and has since 2012 risen from 6 to almost 9. S&P accordingly downgraded the NZ bank credit ratings given the risk of a sharp house price correction. Given the high dependency of overseas refinancing a house price correction risks could push risk a NZ risk premium higher or even tightening the liquidity. The falling dairy prices is also seen putting pressure on farmer’s cash flow as much of past years investments has been financed through bank loans. 23 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 TECHNICALS Medium-term trend-identifiers all point south, but the index is showing a screaming overstretch which calls for a short-term correction higher. In this context 110.80\113.30 is a primary correctional objective. A little depending when this happens, the fast falling ½year exponentially weighted moving average band (114.40\115.90) will play a role, but of course at a lower level compared to where it is right now. -2 12 5 05 06 -2 5 Contracts (thousands) VALUATION After being substantially overvalued since after the financial crisis the correction lower begun earlier this year. This far the NZD has weakened by around 15% in trade weighted terms, but according to our SEBEER long-term fair value model it is still around 10% above its fair value. Hence, there should be more to come. This is moreover confirmed by the real effective exchange rate which gives a similar outcome. New Zealand can still offer an attractive yield and terms-of-trade is still quite attractive, which temporarily could slow down further corrections. At some point it will come, which is why we maintain a negative score on valuation. -4 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Technical view: BOE NZD index Currency Strategy CHF Weighted score: -0.3 Swiss franc Fundamentals ECONOMIC FUNDAMENTALS In the second quarter of 2015 GDP growth surprised on the upside by growing 0.2% q/q and 1.2% resp. Private and public consumption remained the backbone of the recovery. After a weak first quarter, capital spending rebounded strongly indicating that companies have become more optimistic on business expectations. Looking ahead, the KOF leading indicator improved to 100.7 points in August. Being slightly above its long term average of 100 points it indicates that the worst of the franc appreciation seems to be behind the Swiss economy. It is pointing to an improved momentum in the in the second half of 2015. Overall, real GDP is expected to expand by 1.3% and 1.8% in 2015 and 2016 respectively. 0 MONETARY POLICY In the upcoming September meeting, the SNB will see no reason to change its current monetary strategy. After the steep fall in energy prices in past weeks we expect the SNB to cut its conditional inflation forecast. So far, the SNB expects the inflation rate to return into positive territory in the first quarter of 2017. Now it looks more likely that the rate will stay negative until the second half of 2017. Even this subdued outlook is based on the assumption of a devaluation of the Swiss franc over time. The outlook suggests that the very accommodative monetary policy has to remain longer in place than anticipated so far. The board will stress that a tightening of monetary conditions will not be tolerated. Consequently, the bank continues to hold an easing bias. It stands ready to fight any renewed upward pressure on the Swiss franc by intervening in currency markets or cutting the deposit rate even further. As regards macroeconomic forecasts, we expect the bank to revise its outlook for GDP growth in 2015 to “slightly above 1%, up from “just under 1%”. Overall, SNB policy remains negative for the Swiss franc. 0 FLOWS The Swiss current account posted a surplus of CHF 13.7bn in q1 2015, CHF 4.9bn higher than in q1 2014. Cumulated over the past four quarters the surplus totalled CHF50.2bn, down from CHF 65.9bn in the four quarter period until q1 2014. Since the SNB June meeting sight deposits have only risen by CHF 7bn to CHF 463bn, suggesting there were no increased safe-haven flows into Switzerland, which would have forced the SNB to intervene. With the Greece problem disarmed we see no need for a new round of safe-haven flows in coming months, thus keeping the probability of renewed upward pressures on the franc low. +2 24 Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) The Swiss franc remained surprisingly resilient during the height of the Greek crisis and weakened a bit after a solution was found. Nevertheless, the currency remains significantly overvalued and is therefore a huge burden for the economy which will continue to grow only moderately in coming quarters. CPI rates will remain negative throughout 2016. Consequently, the Swiss National Bank will continue to hold an easing bias to fight any upside pressure on the currency. 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy SEBEER Long-term fair value, CHF Index Swiss franc 160 VALUATION In January the SNB allowed its currency to float freely again after being constrained by the 1.20-floor in EUR/CHF for more than two years. It immediately strengthened by more than 20% as the CHF continues to attract foreign inflows. According to the long-term fair value model 1.20 in EUR/CHF corresponded quite well with our estimate, which means it once again is significantly overvalued. After updating our SEBEERmodel fair value estimates for USD/CHF and EUR/CHF are at 1.00 and 1.18 respectively. In real trade weighted terms the CHF deviates more than 3 standard deviations from the historical average. Valuation will eventually drag the franc lower but probably it will be a slow process. -4 150 140 130 120 110 100 90 2001 2003 2005 2007 2009 2011 2013 2015 CHF Long-term Fair value POSITIONING Speculators are currently net short CHF vs USD. Before summer they held a net long position but this one was scaled down over summer and turned into a short position by the end of July. The strong negative trend in sentiment renders a negative positioning score as positioning is far from being excessive and thus no correction to the trend is yet to be expected. -1 TECHNICALS The index is slowly grinding lower and The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. the yearly moving average band (159.60/158.10) has ended up under pressure. If losing this support, the next (admittedly minor) Fibo extension ref at 156.40 could work as a beacon for the market. -1 LIQUIDITY, EVENT RISKS AND GLOBAL CYCLE With a third bailout package for Greece now in place a Grexit is very unlikely in the foreseeable future. Therefore the probability of additional safe-haven flows to Switzerland out of Greece is quite low. On the other hand, after a recapitalization of Greek banks increased trust in these institutions could lead to some flows back home. 25 Technical view: BOE CHF index Currency Strategy Swedish krona E one SEK Weighted score: 0.6 ECONOMIC FUNDAMENTALS Growth is set to continue above trend in 2015/16 (SEB expects 3% for both years) driven by very strong domestic demand (including private consumption and residential investments). Probably, this is hardly surprising given present very loose monetary policy, including negative interest rates, the QE programme and weak krona. Public spending is also likely to become increasingly expansionary with deficits growing. Although state debt is low by international standards, private indebtedness continues to increase at an unsustainable rate. Despite current steady economic growth, we are becoming more cautious as +2 macro/financial stability risks have increased. MONETARY POLICY We and the market have underestimated the extent (and extreme lengths) to which the Swedish central bank has chosen to ease policy in order to prevent SEK from appreciating, boost inflation expectations and signal clearly its intentions ahead of the next round of wage bargaining starting in early 2016. With inflation set to disappoint the Riksbank’s relatively optimistic H2 2015 forecast, there is certainly a risk of further easing at its October meeting. At some point however (relatively soon) the scope for further expansion will close: rates can be cut further but not very far (we think -0.5-0.7% at most while the QE programme at SEK 135bn already risks having a highly adverse effect on Swedish bond market liquidity. Though monetary policy remains very negative for the SEK, it has almost exhausted its capacity to disappoint or cause further harm. -3 FLOWS The current account surplus remains near 7%/GDP. However its composition is changing as the income surplus now far outstrips the previous high trade surplus. Most likely (given the composition of the Swedish international investments position) the income surplus will fall as interest rates rise. Over time we also expect a stronger SEK and a slightly lower trade surplus. The largest quarterly changes are expected to involve portfolio flows. +1 26 Fundamentals Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Risk appetite -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) Our mantra for SEK in 2015 has been that its exchange rate will hit a trade-weighted low in Q1 2015 before cautiously appreciating (with lower EUR/SEK but higher USD/SEK). Market positioning remains short SEK, while corporate and institutional clients have historically high FX exposure. Clearly, SEK is currently undervalued. Further, Sweden retains a large current account surplus. All these factors suggest underlying pressure to appreciate will continue to support SEK. Indeed, the Riksbank is fighting a clear-cut battle to prevent the currency from becoming any stronger. The question therefore arises: Is it appropriate to seek to do so by continued easing given the obvious risks of a house price bubble and threats to financial stability? We still expect modest trade-weighted appreciation by SEK. 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy Swedish krona POSITIONING Our speculative proxy position for SEK versus USD indicates that speculators just switched into a small long SEK position. Even if positioning over the past two years mainly has been net short, the current level of the long position is far from being excessive and why there is no concern for normalization yet. The momentum with in which the index has turned into favouring SEK is strong enough to reflect the current positive SEK sentiment and render a positive positioning score. +2 TECHNICALS Medium-term trend-identifiers to some extent point higher still (towards a weaker SEK), but price action over the past weeks express a doubt to whether the trend is terminated through a "Double-top" at 115.70\80 or if it is just a wide & volatile consolidation. The krona remains modestly negatively tilted until indexsupport at 111.20/110.50 is given up. -1 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE Liquidity remains poor at times which is a handicap for the Swedish krona. And Riksbank government bond purchases (SEK 135 bn) will gradually worsen bond market liquidity likely to add a “liquidity premium” to the krona. Current short SEK-positioning has made the currency trade defensively appreciating in times of risk aversion. This trading pattern will not last. Main risks for the krona are: 1) Adverse developments on the Swedish housing market which could trigger foreign investors to sell some of their record-high holdings of Swedish bonds and equities. However, we still attach a low probability to this event happening; 2) Continued positive (low) inflation surprises pushing Riksbank to ease policy further and; 3) Higher political risk premia / uncertainties which will lower the foreign investor appetite for Swedish assets; 4) Strong USD-appreciation will likely cap the downside in EUR/SEK (as USD/SEK takes off). 27 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) VALUATION The trade weighted krona is clearly undervalued compared to our long-term fair value model (SEBEER). As SEK has continued to slide a weaker exchange rate now contributes to a pick-up in imported prices. This is important for Riksbank as it fights to reach for the 2% inflation target. Nevertheless maintaining a weak SEK is desired by the central bank. There are now even fewer arguments why SEK is a barrier to external trade at current levels. Valuation is hence long-term SEK supportive. +2 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Technical view: KIX index 1.300 125 100 75 50 1.250 25 1.200 1.150 0 Speculative positions 04 05 06 -25 Contracts (thousands) EUR speculative positions USD/CAD EUR/USD 1.350 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. 28 Currency Strategy Norwegian krone VALUATION The krone is now extremely weak against both EUR and USD, around 2 standard deviations from the long-term averages. This suggests that the currency pairs are extremely stretched which is unsustainable. Our long-term fair value model (SEBEER) also suggests the NOK is undervalued against EUR with fair value in EUR/NOK just below 8.00. However, when considering that Norwegian productivity growth has been too weak to match the rapid growth in labour compensation, the real effective exchange rate deflated by ULC indicates that the NOK is still overvalued in real terms. While improving competitiveness has been on authorities’ agenda, we believe the current NOK REER to be at an acceptable level. Overall, we find the current valuation supportive for NOK. +3 POSITIONING Our NOK vs USD proxy for speculative positioning index shows that speculators are short NOK, however to a relatively small degree when compared to the average positioning over recent years. Even if specs were far shorter a few weeks back, the positive NOK sentiment is not strong enough to render a positive score - especially not since the last observation actually points toward a possible rebuild of the short NOK position. 0 TECHNICALS A "B-wave high" at 105.10 has been taken out, but admittedly not overly convincingly so. Yet this still upholds some pressure to reach/break the 109.40 high. And there is a lot of wood to chop within a broad dynamic support zone below (104/99) before NOK can come out of this on a positive note. -2 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE The NOK remains highly vulnerable towards oil. There is a risk that any further cut-back in Norwegian oil sector activity will cause more widespread and negative effects on the rest of the economy. The greatest uncertainty is related to very bearish sentiment indicators. Manufacturing is hardest hit (though being a relative small part of the economy), but the outlook for private consumption is more uncertain. Consumer confidence posted its fourth consecutive decline in Q3 to the lowest level in six years. So far, however, households’ consumption of goods and services has actually been very solid since last autumn. This is partly explained by still-healthy growth in households’ inflation-adjusted income. It cannot be ruled out that confidence will make greater impact on overall private consumption (~50% of mainland GDP) and the housing market going forward. A further drop in oil prices and a lowering of the long-term price outlook would increase the likelihood of expected and actual rate cuts by Norges Bank. In such a scenario, speculative flows would turn even more negative towards the NOK. In the other direction, a recovery in oil price, news that would lower the probability for additional easing or increased fiscal spending would be NOK positive. eric 29 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Technical view: NOK Index (I44) Currency Strategy Calmness is back in the Danish FX market. After a volatile winter/spring dominated by the speculative attack on the peg EURDKK has settled in a narrow range over summer, 7.457-7.465 (i.e. moving in a range of 0.1 percent). DKK is trading at the cheaper end of the usual trading range. We are still seeing steady outflows of DKK leading to continuous intervention and draining of the FX reserve. The FX reserve is about 100bn below the level where the Nationalbank (NB) did its final rate cut. Extraordinary measures taken by the NB in relation to the peg attack have all been removed, so next step is normalising the rate spread to Germany. While a single rate hike can’t be excluded short-term, we expect the negative spread to stay for a while longer. We don’t foresee meaningful changes in EURDKK exchange rate during coming months. ECONOMIC FUNDAMENTALS The Danish economy continues to see steady growth. Second quarter GDP was recently released showing modest growth of 0.2 percent th in the quarter. Still, this was the 8 consecutive quarter of rising GDP. Relative to a year earlier GDP was up 1.8 percent - a sign that the economy is trending closer towards normal cruising speed. Consumption has been a main driver behind the acceleration during the past year but it had a weak second quarter. However there’s little in the fundamental backdrop that indicate this should be a change of trend; employment gains are steady, consumer confidence high, wage inflation improving and house price appreciation firming. Stronger growth in Europe will also be helpful, but fragile markets and falling growth in China and EM constitutes a risk. We forecast annual GDP growth at 2 percent in 2015 and at 2.5 percent in 2016-17 with ongoing improvement in already sound public finances. We see little impact from the recent change of government from a growth perspective. MONETARY POLICY Issuance of T-bills has been resumed and the Nationalbank recently announced that bond issuance will come back in October too. The amount domestic banks can place at the NB at a rate higher than the official deposit policy rate has also gone back to normal. That means ‘crisis measures’ have all been taken away again. Next step is normalising the policy rate spread vs Eurozone, but although a single hike could be seen we don’t expect a full normalisation in the short run. We are not yet seeing any real deceleration of FX outflows and are still looking at reserves 100bn above the level in January. FLOWS The current account is still rock solid at about 7 percent of GDP. Net trade is contributing stronger recently while the income account is weakening a bit. This strong fundamental driver of flows is however still dominated in the short run by hedging flows as well as possibly speculative flows relating to this winter’ s currency crisis. E one 30 ,e 740 rve se r 690 cyn er 640 urc hs nb in K 590 a K D fD o 540 ez is de 490 ta im ts 440 E E U R speculative positio ns U S D /C A D 737 E U R /U S D 1.35 0 705 12 5 742 10 0 1.30 0 50 1.25 0 626 621 Rate cut0 1.20 to -0.75% 1.15 0 51 na J 25 583 0 S peculative positions Unwinding 0 4 of 05 interventions made since rate cut to -0.75% The lack of significant 4 1 ce D 75 06 -2 5 07 Contracts (thousands) Danish krone 535 "Normalisation " of currency progress in reserves upside EUR/USD net 51 51makes 51 the current 51 51 substantial 51 51 lu Should ra rp position ya gu nu longbe speculative a burden. J J A F M A M the sub-1.29-area be revisited, speculative Danish currency reserve longs will have to be reduced. 51 pe S Currency Strategy Danish krone VALUATION DKK is trading at the weaker end of the historical band vs EUR. In a broader perspective, the chronic sizeable trade and current account surpluses do not indicate that DKK would be overvalued – rather the opposite. But as this broader perspective would only become relevant in flexible exchange rate context where the peg would be scraped it carries little relevance. Denmark leaving the peg seems extremely unlikely. We see two events which in the near term have the potential to affect the EURDKK. One would be if ECB reacts to current market turmoil and falling inflation expectations by adjusting upward the size of the QE program. This could strengthen the Krone relative to euro by narrowing the short rate spread. The other event which could see an impact would be renewed turbulence in Greece in relation to the upcoming election. This is not very likely but political turmoil could in an extreme scenario reinstate worries on the euro as a currency thereby directing safe haven flows to Denmark. This could again create an appreciation pressure on DKK. However, as the Danish Nationalbank is still intervening to support Kroner in the context of FX outflows it is most likely that both of the mentioned events would only spur an adjustment in the level of intervention or lead to postponement of already planned rate hikes from the Nationalbank (should there be any). 31 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.30 0 12 5 10 0 75 50 1.25 0 25 1.20 0 1.15 0 0 S peculative positions 04 05 06 -2 5 Contracts (thousands) LIQUIDITY, EVENT RISK AND GLOBAL CYCLE Partly due to size DKK is not the most liquid market. In a global context DKK is rather neutral to the cycle, just as EUR, neither really cyclical nor outright defensive. 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. Currency Strategy Russian rouble We have revised our USD/RUB forecast since our last Currency Strategy based on a new, lower oil price forecast. With oil (Brent) seen averaging $54.1 per barrel (down from $70) in 2015 and $55 per barrel in 2016, we expect USD/RUB at 70 by the end of 2015 and at 75 by the end of 2016. ECONOMIC FUNDAMENTALS The rationale behind the forecast is the high correlation between changes in the price of oil and the RUB exchange rate. In addition, due the strong dependence of government revenues on oil (roughly 50% of revenues come from the hydrocarbon industry), the central bank will let the RUB depreciate, as long as the fall is not too precipitous. The federal government budget deficit was 1.1% of GDP in a year when oil prices averaged RUB 2,750 per barrel (in inflation adjusted terms [Jan 2010=100]). So far this year, the price of Brent has averaged roughly RUB 2,130 per barrel. The government expects the budget deficit to widen to 3.7%, of which the bulk will be covered by tapping into the Reserve Fund. However, the Kremlin is wary of using reserves to fund a budget shortfall resulting from lower oil prices, as it suspects oil prices may stay low for years to come. The government will cut spending on essentially everything except pensions and defence. The central bank is caught between a rock and a hard place. On the one hand, a stronger RUB would stem inflationary pressures and support banks with external liabilities and domestic assets. On the other hand, it will be under pressure to let the RUB depreciate with oil to boost budget revenues. If oil prices fall again (as we expect), the central bank will most likely let the RUB weaken, intervening only if the fall is too precipitous. To ensure financial stability, it will call on the government to support struggling banks through direct capital injections. Real GDP contracted by 3.4% y/y in 1H ’15, and looks set to end the year down by 4.0%, on the back of lower oil prices. Sanctions by the EU are set to expire on January 31, 2016, but will probably be extended another six months. Inflation has jumped, reaching 15.6% y/y in July. It has moderated slightly since March, but will probably be sticky. The key drag on the economy is private consumption, which has taken a hit from a fall in real household income and rising unemployment. -1 MONETARY POLICY The CBR has cut the policy rate by 600bps since January to 11.0%. It maintains a dovish stance, but will likely keep the rate on hold for now to prevent excessive RUB weakness. When oil prices stabilise, the CBR will resume cutting the policy rate. -1 FLOWS The current account surplus was $59.5bn in 2014 and $48.1bn in 1H 2015 on the back of lower merchandise imports. We see the current account continuing to generate a surplus. Private capital flows recorded another net outflow in 1H 2015, but the pace of capital outflows has slowed, stabilising reserves around $36bn. We expect net capital outflows to continue in 2015, but at a manageable pace for the CBR. 0 32 RUB Weighted score: -1.1 Fundamentals Carry Monetary policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Global cycle -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 Currency Strategy Russian rouble VALUATION The swings in the valuation of the RUB have been quite extraordinary. Over the past 12 months, it has gone from being overvalued by some 30% against an estimated fair value of 45 against the USD to be undervalued by between 25% and 30%. The real effective exchange rate (REER) is currently 14% below its 10-year average. However, for the federal government budget to balance at an average price of Brent at $54.1/barrel, USD/RUB would need to move to 82, assuming that the budget balances around an average rate of RUB 2,700/barrel (in inflation-adjusted terms). This back-of-the-envelope calculation suggests that the RUB is currently overvalued by some 26%. Yet, with oil prices averaging more than $50/barrel, the RUB is -2 unlikely to weaken that much. POSITIONING Speculators in the RUB have turned from being long the RUB at the time of our previous Currency Strategy to being net short on anticipation of the RUB weakening with oil. We expect positioning to be less extreme over the coming months as oil prices stabilise at lower levels and the CBR intervenes verbally to support the RUB. The 3 score is due to the expectation that speculators will begin to normalize their short position. +3 TECHNICALS The rouble waxed and waned during the correctional sequence following last year’s panic-peak at 71.80. A correctional low (48.80) is probably behind us now and all focus is back on 71.80. Last week’s potentially short-term bearish print in USD/RUB is likely not enough to save the day for the (t)rouble, which has a lot of wood to chop in a wider (61.10/52.10) area before getting out in the clear. Far more likely is an extension higher, taking -3 out both 71.80 & 78.00 before this is over. EVENT RISK, LIQUIDITY AND GLOBAL CYCLE The rouble is facing two key risks: 1) a new fall in the price of oil; and 2) a deterioration in relations with the EU and US. While oil has room to fall further, another 50% decline appears unlikely. Regarding relations with the “West”, Russia is unlikely to expand the war in eastern Ukraine because it does not need to in order to prevent Ukraine from joining NATO and the EU. The rebels would like to gain control over a larger, more economically viable area including the port city of Mariupol and the coke factory in Avdiivka. However, the potential cost of capturing these strategically and economically important sites would likely be high and prompt additional sanctions. In such a scenario, which has a likelihood of roughly 25%, capital outflows would resume and send the RUB down again. -1 33 Technical View: USD/RUB Currency Strategy Chinese yuan CNY Weighted score: -0.9 We expect USD/CNY to end this year at 6.6 and 6.7 in 2016. CNY went through a tectonic shift this month when it devalued by close to 5% and more importantly changed the daily fixing methodology to be market driven. CNY has taken a big step towards a free floating currency. Although capital account needs to be more opened to be a free float, this is a once in a decade shift similar to when CNY depegged from the USD in July 2005 and China joined the WTO in 2001. Fundamentals Carry Monetary policy Flows Valuation Positioning Technicals Liquidity ECONOMIC FUNDAMENTALS Growth is expected to MONETARY POLICY Monetary conditions are easing and the process will accelerate. Inflation has fallen to 1.6%, well below the 3% target we expect the PBoC to cut deposit rates to 1.00% by YE-2016 from 1.75%. We also expect the reserve requirement ratio to be cut by 200bps to 15%. China is moving away from capital intensive economy to a service oriented and consumer based economy, which will also structurally reduce the demand for funding and reduce rates. Lastly, China has embarked on floating the currency so that it does not inherit the US interest rate hike that are to come to make sure that domestic monetary conditions remain ample. -1 Ec. Surprise Event risk Global cycle -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 50 1.30 0 % yoy 3mma 40 1.25 0 12 5 10 0 75 SEB China construction indicator 50 Steel Production 25 1.20 0 30 1.15 0 20 0 S peculative positions 04 10 Contracts (thousands) decelerate to 6.8% this year from 7.4% in 2014 and continue weakening to 6.5% in 2016. The economy is facing headwinds from reforms, lacklustre export growth, reduction in investment as it moves away from heavy industry to services and downturn in domestic demand led by the construction sector. High inventory and tighter lending standards are slowing construction activity. Policymakers are finally awakening to the steepness in the downturn and accelerating policy easing to stabilize the economy. We think by 1Q 2016, construction activity will slowly recover from contracting to a slightly positive. -1 05 -2 5 06 07 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced. 0 -10 -20 -30 07 08 09 10 % yoy 40 11 12 13 Bank Loan 14 15 Total loan (incl TSF) 35 30 25 FLOWS The shift in making the currency more free floating will change the flow dynamics and what will drive currency movements. China still maintains a steady long term inflows that supports the currency over time with a current account surplus and net FDI inflows, which add up to 5% of GDP. However, a more liberal currency means that short term flows like capital flows will drive currency movements in the near term. Capital flows have been heading outwards and leading to CNY weakness. For the next 12 months, capital outflows will remain because domestic companies will need to play catch up and hedge their currency exposure. Most Chinese corporates have been long CNY vs USD because the currency was appreciating and more importantly the volatility was too low to make a big impact on profits. Now with a more floating exchange rate, your entire year’s profit can be wiped out in several days. This will force domestic to diversify and continue to buy USD and -1 weaken the CNY. 20 15 10 05 12 06 07 08 09 10 11 12 13 14 15 China BOP % of GDP 10 8 6 4 2 0 -2 -4 Current Account -6 FDI Capital flow ex FDI -8 E one 05 34 06 07 08 09 10 11 12 13 14 15 Currency Strategy 135 VALUATION China’s government and IMF have both 130 stated that CNY has reached fair value. Furthermore, CNY’s real and nominal effective exchange rates (REER and NEER) have strengthened by 30% since 2009 and over 10% in the last 12 months from USD strength. The pace of REER appreciation is one reason China devalued recently and China considers its currency fair or slightly over-valued. 0 125 CNY 120 115 110 105 100 95 NEER REER 90 POSITIONING We look at how spot is trading relative to daily fixing and the band of +/- 2% and spot is now at fixing, meaning positioning is flat. However, over the next 6-12 months, we think domestics are long CNY from low volatility and multiple years of currency appreciation and will need to reduce those positions. -1 85 07 08 09 1.5 0.5 market stone unturned. As for USD/CNH one must expect additional gains beyond the 2011 high of 6.59 which was equaled during the rally last month. A short-term correction lower is thought ebb no later than in the 6.36/34-area. Once 6.53 is taken out, a correctional low is nailed and fresh highs should thereafter be traded. -3 0.0 1.30 0 -0.5 1.25 0 -1.0 1.20 0 -1.5 1.15 0 35 12 13 14 E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0 1.0 TECHNICALS The CNY devaluation left no financial LIQUIDITY, EVENT RISK AND GLOBAL CYCLE Even CNY has succumb to the mighty USD and the global cycle. Spot market may still be controllable for PBoC, for forward investors, the CNY can sell off quite a bit very rapidly and makes it vulnerable to global events. The key event risk for China in the next 12 months whether IMF accepts CNY into the SDR basket of currencies in November. We think CNY will be included or hinted to be added in 2016 and provide a brief relief rally for CNY. However, it will be a disaster if IMF does not accept CNY. It is very clear that China is seeking to be part of the international community and when good deeds are rejected, China can turn away and start their own IMF or international organizations like AIIB. When the Japanese Yen was included in SDR in 1980, it did not meet many of the criteria but was included for political reasons. IMF should do the same but alienating China would be negative for the global risk environment. 11 15 USD/CNY spot spread to fixing % 2.0 -2.0 10 12 5 10 0 75 50 25 CNY 1 -1 p e S 0 S peculative positions 04 High 05 Low 06 -2 5 Contracts (thousands) Chinese yuan 07 1 2 2 2 2 3 3 3 3 4 4 4 4 5 1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 r - lack r n p upside r c The c significant c ra nprogress p of p ce in a e a n e u e e a u u J e J e M J S makes M current D EUR/USD D M the S D Msubstantial S D net long speculative position a burden. Should the sub-1.29-area be revisited, speculative Technical view: longs USD/CNH will have to be reduced. 5 -1 n u J Currency Strategy SEB INTERNAL SCANDIE FLOW ANALYSIS Excessively large short NOK positioning Using a similar approach on EUR/NOK flows as we do on EUR/SEK, has shown a relative close relationship between our aggregated speculative client flows and EUR/NOK. However, we do not have as long time series for the NOK flow analysis as we do for SEK. If assuming that speculators where positioned neutral at the beginning of 2014 they would currently be very short NOK. The negative NOK sentiment has been ongoing since April 2015 and has taken positioning from a small long to the current large short. As this is the shortest position in at least two years it looks excessive and thus sensitive to a normalization process. However, such a normalization, which would support NOK, needs an external trigger such as e.g. a longer lasting correction higher in oil prices. FX is an over-the-counter (OTC) product. Consequently, neither volumes nor flows are readily available. For G7 currencies, positioning data provided weekly by the Commitment of Traders (COT) report are widely used as a proxy for investor flows and positioning. However, no COT data for SEK or NOK is available. We have therefore built an analytical framework around our own flows which we use to assess market sentiment and positioning for SEK and NOK where the client category foreign financial institutions is used as proxy for speculative flows. Continued downscaling of the short SEK position Speculative flows have generally been the main driver of EUR/SEK since H2 2012, reacting primarily to changes in the Riksbank’s outlook for monetary policy. The chart below supports such a notion as it shows how closely speculators weekly aggregated net flow and EUR/SEK have followed each other since 2013. If assuming that speculators where positioned neutral at the beginning of 2013 they would currently, based on our flows, be very short SEK vs. EUR, but not as short as earlier in 2015. Mid-April 2015 specs according to our index begun to scale back on their long-term short SEK position. Just ahead of the Riksbank rate decision in July they scaled down even more. With fundamentals supporting SEK and almost only the Riksbank working to weaken SEK we see less and less reason for holding on to, and even more to add to, the short SEK position. Therefore we expect the index to continue to indicate downscaling of the short position in the coming months. Note that the relatively close relationship between speculative positioning according to our index and EUR/SEK temporarily broke down in Feb 2015 when EUR/SEK fell sharply without our index moving much. Looking at the other client categories it turned out that it was mainly domestic institutions that sold SEK during this period. Speculative positioning vs. EUR/NOK 7.5 -1,000,000,000 -1 ,5 00,000,000 -2,0 00,000,000 Speculative positioning (lhs) Long NOK Short NOK 9 9.25 EUR/NOK (reversed) 8.75 -90,000,000 -190,000,000 9.5 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 EUR/NOK (reversed) Background information Input data: Since SEB’s share of trading in Scandies is large, our order flow and FX tick database may provide significant information regarding market sentiment. Consequently, we aggregate tick-data on daily, weekly and monthly basis. Measures: Using input data for net flows (all buy orders minus all sell orders during the period in question) and volume (all buy orders plus all sell orders during the same period) we work primarily with two indicators to provide information on SEK and NOK sentiment and positioning: Net flow (%): Net flow / volume (sentiment proxy) Aggregated net flow (position proxy) Client categorization: Of course, while total net flow and volume are interesting, we believe (a view also supported by research findings1 and in-line with how Commitment of traders’ data is analyzed2) an examination of client subcategories provides even better information. We use two basic categorizations, one differentiating between domestic and foreign clients and the other between corporate and financials providing us with the four sub-categories: 1. 2. 3. 4. Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 -2,500,00 0,000 8.5 Speculative positioning EUR/SEK (reversed) Long Short SEK 0 - 500,00 0,000 8.25 110 ,0 00,0 00 -290,000,000 • • 8.20 8.40 8.60 8.80 9.00 9.20 9.40 9.60 9.80 8 210 ,0 00,0 00 10,000,0 00 Speculative positioning vs. EUR/SEK 500,000,000 7.75 310 ,0 00,0 00 1 Foreign financial institutions (proxy for speculative flows) Foreign corprorates Domestic financial institutions Domestic corporates See among others Lyons R, The Microstructure Approach to Exchange Rates, The MIT Press, 2006. 2 The Commitment of traders report consists of three reported categories for each currency: (1) Commercial accounts, (2) Noncommercial (i.e. speculative) and (3) Small accounts. However, in FX a widely used praxis is to follow only the non-commercial flows. EUR/SEK (rhs) 36 Currency Strategy Contacts STOCKHOLM Carl Hammer (editor) +46 8 506 231 28 [email protected] Richard Falkenhäll +46 8 506 231 33 [email protected] Dag Müller +46 8 506 231 29 [email protected] Per Hammarlund +46 8 506 231 77 [email protected] Karl Steiner +46 8 506 231 04 [email protected] COPENHAGEN Frederik Engholm-Hansen +45 33 28 14 69 [email protected] FRANKFURT Thomas Köbel +49 69 97 27 12 45 [email protected] OSLO Erica Blomgren +47 22 82 72 77 [email protected] SINGAPORE Sean Yokota +65 6505 0500 [email protected] Anders Söderberg +46 8 506 230 21 [email protected] 37 Disclaimer Analyst Certification We, the authors of this report, hereby certify that the views expressed in this report accurately reflect our personal views. In addition, we confirm that we have not been, nor are or will be, receiving direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in the report. This statement affects your rights This research report has been prepared and issued by SEB Research a unit within Skandinaviska Enskilda Banken AB (publ) (“SEB”) to provide background information only. It is confidential to the recipient, any dissemination, distribution, copying, or other use of this communication is strictly prohibited. Good faith & limitations Opinions, projections and estimates contained in this report represent the author’s present opinion and are subject to change without notice. Although information contained in this report has been compiled in good faith from sources believed to be reliable, no representation or warranty, expressed or implied, is made with respect to its correctness, completeness or accuracy of the contents, and the information is not to be relied upon as authoritative. To the extent permitted by law, SEB accepts no liability whatsoever for any direct or consequential loss arising from use of this document or its contents. Disclosures The analysis and valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties; different assumptions could result in materially different results. The inclusion of any such valuations, projections and forecasts in this report should not be regarded as a representation or warranty by or on behalf of the SEB Group or any person or entity within the SEB Group that such valuations, projections and forecasts or their underlying assumptions and estimates will be met or realized. Past performance is not a reliable indicator of future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. Anyone considering taking actions based upon the content of this document is urged to base investment decisions upon such investigations as they deem necessary. 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To find out how you can develop your electronic trading, visit us at www.seb.se/mb. Or call one of our traders to activate our e-service: Gothenburg +46 31 774 90 60 Malmö +46 40 667 69 10 Stockholm +46 8 506 231 40
