Market overview
The ECB seems to be getting ready to cut rates in June and hence introduce a negative deposit rate to combat low inflation.
The US recovery is back on track after hitting a soft patch due to the exceptionally harsh winter. Meanwhile, economic growth in China is stabilising after the recent slowdown.
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Interest Rate Hedging
We expect the ECB to introduce a negative deposit rate in June. It could also be considering other options aimed at boosting liquidity in the banking system or supporting increased lending.
If the ECB delivers, this should support lower money market fixings, lead to slightly lower rates at the short end and steepen yield curves.
Given the low interest rates and the outlook for further stimuli from the ECB, we recommend keeping hedge ratios above average relative to benchmarks. We see most value in hedging terms to maturity of more than five years.
FX Hedging
As a consequence of the signals of further monetary easing and with the US economy getting back on track, we have adjusted our EUR/USD forecast. We now expect the EUR/USD to fall to 1.35 on a 3M horizon and towards 1.28 on a 6M-12M horizon.
We expect the Swedish central bank, the Riksbank, to cut rates by 0.25 percentage points in July. The Riksbank's inflation forecast looks too optimistic, in our view, and we see a risk of the central bank signalling further rate cuts in July, which would further weaken SEK. Also, the SEK is likely to lose a supportive factor from M&A-related news (Volkswagen's acquisition of Scania) and lower liquidity during the summer months could add to the risks of significant SEK weakening.
We therefore recommend that companies with SEK-denominated income should hedge income via FX forwards or, alternatively, via so-called improving forward strategies.
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