Pay NOK 2Y1Y versus SEK in a forward spread at 76bp (indicative). Roll down +1.7bp/m. Profit/loss: 96bp/60bp.
CPI data in Sweden and Norway this week highlighted the difference in the two economies. In Norway, CPI came out very high, well above all forecasts, driven mainly by domestic factors (see more below). In contrast to this, Swedish CPI data were more or less spot on expectations and the inflation rate is still held down by domestic factors such as historically low service prices (page 2-3). We think this deviation will persist but this is not really reflected in (money market) interest rates. Currently, the market implies a much more aggressive Riksbank from the end of 2015 and onwards. For instance, market pricing suggests that the 1Y swap rate will rise by 65bp in Sweden over the next two years, while only a mere 22bp is expected in Norway. We do not agree with this kind of pricing.
So, despite the recent spread widening, we think there is still a good opportunity to go for more underperformance in NOK rates. We see the 2Y1Y spread as the sweet spot, as it offers the best roll down and potential spread widening. However, as the spread has moved a lot lately and is close to highs, it might be wise to start small and be ready to scale in if the spread moves the wrong way. Note that we like both cases (i.e. both the NOK and SEK on a standalone basis).
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