Riksbank Rate Cut Likely This Coming Week

We expect the Riksbank is likely to cut the repo rate this week. We would also not be surprised to see something more/else, with the most likely course of action being a downside premium in addition to the cut. We also feel relatively confident that the Riksbank will postpone its first hike deep into 2015.

Currently, the market discounts a chance of a rate hike starting in September 2014 and a full hike by the end of Q1 15. We think that is too early given current market conditions. As a consequence, last week in Reading markets Sweden we recommended selling (receiving) FRADEC14.

Short-term, the outlook for the SEK is not constructive. However, when we look into 2014 our view that the ECB will stay on an easing bias and eventually cut its deposit rates into negative territory should support the Swedish krona against the euro and again send the EUR/SEK well below the 9-level.

Following the sharp slide in the krone during the autumn, November's Norwegian consumer price data released last week confirmed that Norway is a long way off further rate cuts. The downturn in the krone is gradually feeding through into higher import prices at the consumer level and core inflation is back at 2.0% y/y. ·

After the November inflation data long the NOK/SEK again looks like an attractive trade. The core inflation spread between Norway and Sweden has not been this high since the summer of 2009, when NOK/SEK traded in the 1.16-1.20 range and relative rate is expected to add further support to the cross this week.

Over the past week, the EUR/DKK edged further above the central rate of 7.46038. The main explanation for the move higher is the turn-of-the-year-effect, which has increased the negative carry on short EUR/DKK positions and subsequently put the DKK under pressure. Note, though, there is still some distance to the critical levels we saw in January, when Danmarks Nationalbank (DN) was forced to intervene for around DKK12bn and subsequently increase interest rates, and we doubt an independent Danish rate hike is imminent.

To Read the Entire Report Please Click on the pdf File Below.