SEB FX Ringside 15 March 2016

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Chloe Harvey
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1 SEB FX Ringside 15 March 216 Norges Bank still aiming at seducing markets Author: Erica Blomgren Norges Bank is widely expected to cut rates on March 17. We agree, but the decision isn t set in stone. The path should be lowered, signalling a high chance of another cut. The bank s decision to keep the deposit rate at.75% in December was surprising considering Norges Bank s projections at the time would motivate lowering rates: The rate path implies a 6% probability for a 25bps cut this week and 1% for such a move by mid-year. In our view, the main objective for Norges Bank is to continue fuelling expectations for even lower policy rates. Hence, Norges Bank sees it just as vital to keep lower policy rate expectations alive as to actually cut rates. Considering broadly as-expected developments since December, or slightly weaker, there s no reason to stay on hold at this juncture. Downside risk to the bank s mainland GDP forecast for the current year lingers due to negative back-revisions in the national accounts for 215. Coupled with a tad higher registered unemployment the bank will project a slightly more negative output gap. Moreover, the bank s prediction for oil investment should be lowered for We thus believe the bank will deliver a 25bps cut to a new record-low.5% and maintain a dovish bias. THE DECISION IS NOT SET IN STONE. Recall that Norges Bank in December stated that uncertainty as to the effects of the monetary policy stance suggests a cautious approach to interest rate setting and noted increased risk of financial imbalances. The bank could easily pull the inflation card as core CPI has been well above target for 9 months and there are signs of a more permanent upward shift in inflation expectations. At some point, Norges Bank might raise concern about persistently high inflation which will impact the monetary policy stance and force a more relaxed approach towards NOK. For now, however, weak growth should trump high-side inflation. MAINTAINING A CLEAR DOVISH BIAS. The new rate path must live up to expectations for even lower policy rates to avoid fuelling a too strong NOK. However, recent comments might hint that the bank is reluctant to precommit to another rate cut given the uncertain effect it would have on the real economy. Weaker mainland demand, lower rates abroad and higher money market premiums will weigh on the path. In addition, higher inflation and slower wage growth will in sum push the rate path lower, but most so from 217. In total, we expect the short-end of the rate path to be lowered by approx. 5-1bps, implying a ~75% probability for another cut this year. The long-end of the curve should see a somewhat larger downward adjustment of approx bps, suggesting a key rate of ~.77% by the end of 218 (previously.88%) and 1.2% by end-219. HEDGE SHORT EUR/NOK POSITION? Uncertainty surrounding the outcome of the rate decision is high. We see following three scnearios as possible: 1. Main scenario (6%): A 25bps cut, rate path signals 5-8% likelihood for another rate cut. 2. Dovish (25%): A 25bps cut, rate path signals 1% probability for at least one more rate cut. 3. Hawkish (15%): An unchanged key rate, rate path signals 1 to 2 further rate cuts. Market is currently discounting a ~6% probability for a rate cut on March 17, but expects two full 25bps cuts in total this year. Speculative accounts have trimmed their net short NOK position recently. We currently hold a short EUR/NOK recommendation (entry 9.63). In our main scenario and in the event of a dovish surprise, we expect EUR/NOK to trade higher. We would put a stop on the trade at entry and to protect the position the 1 week risk reversal 9.6/9.35 is trading roughly at zero cost. You can also find our research materials at our website: 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.

6 SEB FX Quant indicators 15 March 216 Post Norges Bank price action analysis The decision tends to impact EUR/NOK for 3-5 days Author: Karl Steiner Usually there is large daily volatility when Norges Bank announces rate decisions. The largest price impact tends to be within the first twenty minutes but there is a continuation pattern in EUR/NOK. Focusing on EUR/NOK reactions after the past three cuts indicate a NOK weakening effect that lasts about 3 days while the NOK has strengthened on average 4 days after unchanged decisions in 215, though the magnitude of the impact has been much larger after cuts. Large daily volatility Days with rate decisions tend to be volatile for EUR/NOK where especially changes to the upside have been large: Average upside change: figs (max 25.4 figs) Average downside change: -7.1 figs (max figs) Intraday continuation pattern Usually the largest part of the daily change materializes during the first twenty minutes after a decision. However, EUR/NOK also shows a clear tendency to continue in the initial direction at least until CET in the afternoon. Next day reversal pattern only in March The day after rate decisions EUR/NOK has a tendency to continue in the same direction as it did on the day with the decision. However, in March there is a reversal pattern. Impact 3-5 days (Mon or Wed) The impact on EUR/NOK has been large after rate cuts (on average +3.1%) with a peak after two days. Following unchanged rates in 215 the impact has been more limited (on average -1.7%) but has lasted a bit longer (for three to four days). Thus one may expect the impact on a possible cut on Thursday to end Monday afternoon while EUR/NOK could continue to fall until Wednesday following an unchanged decision. EUR/NOK daily ranges following scheduled events (212+) Norges Bank GDP FX purch Inflation Retail sales PMI manufact Indust prod No event Unemployment Median range (figs) EUR/NOK change in figs NOK stronger Change in EUR/NOK (%) Daily change in EUR/NOK on days with rate decisions Average rise 12.9 Average fall -7.1 Mar-12 May-12 Jun-12 Aug-12 Oct-12 Dec-12 Mar-13 May-13 Jun-13 Sep-13 Oct-13 Dec-13 Mar-14 May-14 Jun-14 Sep-14 Oct-14 Dec-14 Mar-15 May-15 Jun-15 Sep-15 Nov-15 Dec-15 Intraday the initial reaction tends to continue till around : 11: 12: 13: 14: 15: 16: 17: 18: 19: 2: 21: 22: 23: Mar 14 (LHS) May 14 (LHS) Sep 14 (LHS) Oct 14 (LHS) Mar-15 (LHS) May 15 (LHS) Nov 15 (LHS) Dec 15 (LHS) June 14 (RHS) Dec 14 (RHS) Jun 15 (RHS) Sep 15 (LHS) A tendency for a reversal in direction the day after in March Year Size of reversal Decision % Unch 211.6% Unch 212.3% Cut 213.5% Unch 214.2% Unch 215.7% Unch Aggretageted 1.2% Averge return.2% % of reversals 83% Aggregated change in EUR/NOK following rate decisions Cut Unchanged Open level x days after the rate decision NOK weaker EUR/NOK change in figs Change in EUR/NOK (%) You can also find our research materials at our website: 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.

7 FX Ringside FX recommendations B/S 15-Mar Price obj. Stop P/L Start val / Start date EUR/SEK Sell % Oct EUR/NOK Sell % Feb GBP/SEK Closed % Oct FX Forecasts SEB Forecasts Action levels 15-Mar 1m Q2 16 Q3 16 Q4 16 Q1 17 Buy Sell EUR/USD EUR/SEK USD/SEK EUR/NOK USD/NOK NOK/SEK GBP/USD EUR/GBP GBP/SEK EUR/CHF USD/JPY EUR/JPY AUD/USD USD/CAD EUR/PLN EUR/HUF USD/TRY USD/RUB USD/CNY USD/KRW USD/SGD Central Bank forecasts Sweden Norway USA EMU Japan UK Canada Switzerland Base rate -.5%.75%.25-.5%.% -.1%.5%.5% -.75% Next meeting 21-Apr 17-Mar 16-Mar 21-Apr 15-Mar 17-Mar 19-Mar 17-Mar Action expected unch -.25% unch unch unch unch unch unch Next change Q Sep Jun-16 Q Direction hike bps % +25 bps hike ---

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