EUR/SEK what explains the recent decoupling? Martin Enlund, Chief Analyst, Global Strategy

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1 EUR/SEK what explains the recent decoupling? Martin Enlund, Chief Analyst, Global Strategy

2 Key takeaways EUR/SEK has decoupled from monetary policy expectations recently (p.3) The recent sell-off in global stock markets did not impact materially on the SEK either - this is unusual (p. 3) This decoupling from classical drivers of the krona is not attributable to safe haven flows (p.4) A shake-out of carry currencies vs low-yielding funding currencies may have played some (small) part of the resilience of the SEK especially vs. NOK (p. 5) The most important driver however is USD/SEK profit-taking (p. 6) Mean-reversion of surprise indices may have helped the krona too (p. 7) 2

3 EUR/SEK has decoupled from monetary policy & risk sentiment The krona has decoupled from monetary policy expectations recently, as it has strengthened despite expectations of a soft Riksbank This is not about a ECB QE premium since NOK/SEK has behaved in a similar way Furthermore, the recent 5% sell-off in S&P500 did not dent SEK sentiment, which is also unusual 3

4 EUR/SEK decoupling not due to safe-haven flows Itraxx Senior Financials has widened, suggesting a stronger krona from a safe-haven perspective However, peripheral bonds are behaving nicely, and for the past few months, tighter Spanish spreads have corresponded to a stronger krona(!) Also, the lack of intervention from Switzerland s SNB undermines this thesis 4

5 SEK: decoupling not due to a FX carry shake-out In an environment in which vols are rising, more liquid currencies fare better, especially if positioning has been against a specific currency The SEK has gained vs the less-liquid NOK since mid-august, possibly due to a carry shakeout? However, this cannot explain the drop in EUR/SEK. That said, if only vols rise enough, EUR/SEK would probably head higher as well 5

6 SEK: USD/SEK profit-taking an important driver Being long the USD has been a key theme for many Swedish FX participants throughout 2014 The peculiar decoupling in EUR/SEK started as USD/SEK touched the 2012 high around 7.27, since then EUR/SEK has traded lower We may thus have seen closure of negative SEK positions (a closing of long USD/SEK positions) Indeed, we have seen some USD position squaring recently 6

7 SEK: surprise indices may have helped the krona too The relative rise in Swedish economic surprise indices have seemingly supported the move lower in both EUR/SEK and NOK/SEK, despite the lack of support from interest rates Assuming mean reversion of surprise indices (these indices will converge to zero barring any new surprises) we ll see a lower NOK/SEK in the future, but a higher EUR/SEK (!) Barring any shocks, the relative surprise index will drop to zero in 90 days 7

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