PMI Data In Focus, Still Risk Of A Further Correction Lower In NOK/SEK‏

In this note we take a closer look at the key events in the three Nordic countries over the coming week.

The week will be relatively thin in respect of Scandi events, but we recommend keeping an eye on the PMI numbers that are expected to move above 50 in both Sweden and Norway.

We take a closer look at the possible Scandi impact if the ECB - contrary to our expectations - cuts rates this week.

In the short term, the current correction lower in NOK/SEK might have further to go, not least as the Swedish economic surprise index might have bottomed out.

What if ECB walks the walk this week?
Attention turns to the ECB meeting on Thursday. A month ago Mario Draghi opened the door for cutting the deposit rate to negative territory. The question now is whether he will deliver or was this another case of verbal intervention? We actually think that the likelihood of a deposit rate cut at the upcoming ECB meeting is close to nil, and the chance that the ECB will move to negative rates at a later stage is very small. The likelihood that the ECB cuts the refinancing rate to 0.25% is higher. Our baseline scenario is that Mario Draghi will deliver nothing but soft wording.
Despite our expectations that the ECB will stay put at this week’s meeting, it makes sense to take a quick look at how the Scandi central banks would react to the unlikely scenario that the ECB will lower the refi-rate or even cuts the deposit rate to negative territory.

Due to the Danish currency peg to the euro Danmarks Nationalbank (DN) would react to an ECB rate cut. A month ago we saw that DN opted for just a 10bp cut in the lending rate to 0.20%, saying that ‘the low monetary policy rates leave limited leeway for a reduction of DN's lending rate’. We believe the reaction function will be similar this time, and we would expect another 10bp cut in the lending rate to 0.10%, if the refi-rate is cut to 0.25% by the ECB. If the ECB goes negative by 25bp the Danish Certificate of Deposits (CD) rate is expected to be lowered by 25bp to -0.35%. The CD rate determines market rates as Danish banks have a large need to place funds at DN. At the time of the 10bp cut a month ago, we saw a minor move lower in EUR/DKK. This time the surprise should be smaller, but still a marginally move lower in EUR/DKK is likely. That said, we certainty do not expect that we are in for a new DKK appreciation trend. In fact, the slow move higher in EONIA rates due to the draining of liquidity in the eurozone (LTRO repayment) works in the other direction as Danish short-dated Cita rates are locked by the CD rate.

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