SEB FX Ringside 25 November 2015 Travel notes from trip to Asia Last week we travelled to Asia to meet with clients there. We summarise our impressions of what s most interesting/concerning to Asian investors (China) as well as the view on Nordic macro developments (worry over Swedish housing market developments). Author: Carl Hammer corresponds roughly to the amount bought by Riksbank. The fact that SEK has not weakened during this period shows that bonds have been FX hedged and that other positive flows from the general short position in SEK offset this negative impact. Very little questions appeared on the effects of the large numbers of asylum seekers in Sweden and the very uncertain political situation currently to handle this crisis. Last week we visited four different countries in Asia to meet with primarily financial institutions. The purpose was to update our Asian clients on the European and Nordic macro/financial developments. Although the discussions were centred on Europe and the Nordics it is (to state the obvious) rather obvious just how important China is to overall sentiment. Clients did express a general disbelief that the overall growth rate is close to 7% 2015 as the impression is that China is/has slowed to a materially lower pace of growth. The outlook remains weak in the opinion of most clients we met reflecting also our own view that growth will continue to slow to a 6%- handle in 2016. That forecast also comes with a negative surprise bias. On Europe the tragic events in Paris took most of the attention and how that will impact overall sentiment, ECB monetary policy outlook and also the long-term outlook for the euro. Here, we are still of the opinion that the effects will be limited but that it adds to our belief ECB will deliver (at least) what the market expects on Dec 3 rd (eg rate cut and QE extension/increased paced of purchases). On the Nordics and Sweden: generally speaking we always get similar questions on the outlook when traveling outside of the Nordics: 1) Clients are bullish NOK as the currency despite low oil prices has weakened more than anticipated. Long-term oriented investors are scaling into short EUR/NOK at current levels looking for a return to 8.50. Liquidity however is a big handicap for the NOK and many investors are reluctant to enter the Norwegian market given limited NOK turnover.2) We came with the impression that although (continued) worries over loose monetary policy in Sweden remains with special regards to unsustainable housing market developments this is actually not the prime reason (longterm risk for financial stability) why foreign investors are selling Swedish government bonds. The decision to lower the exposure to Swedish bond markets has to do with the negative outlook for bond prices over time and the fact that Riksbank is entering the market with force. Hence distorted liquidity and negative price outlook dictate the appetite for Swedish bonds. We estimate that foreign investors have sold approximately SEK 100bn worth of bonds since the introduction of QE in Sweden, which COMMENT: EUR/SEK REMAINS STUCK IN RANGE UNTIL MID-DECEMBER. SEK outlook is positive for several reasons we have mentioned for long: 1) The currency is undervalued; 2) market remains underweighted SEK, 3) Current GDP and inflation developments call for nominal GDP to reach 5% in the coming 1-2 years making 4) more criticism to arise as regards the ill-placed stance of Swedish monetary policy given effects on house prices and growth in private indebtedness. Once the market starts to price Swedish divergence from the easy stance of the ECB, the expected financial conditions tightening will come from the currency (rather than Swedish rates trading substantially higher). The calendar is jam-packed with very important events until the Riksbank rate decision on Dec 15 th. Apart from all central bank rate decisions - ECB the most important for SEK - (more on EUR/SEK reaction to ECB decision next week) we also have the annual PPM flow (SEK 36bn due on Dec 14 th ) which should work to keep EUR/SEK from trading below 9.20 (levels below looks certain to push Riksbank to cut rates again). Volatility may well continue to pick-up (we prefer direction tough and have recommended to sell EUR/SEK at 9.40 on Oct 27th). Currently market is long gamma (clients are short) making continued range-trading expected (9.20-9.40). As we approach December and with spot at 9.20-9.25 the case for buying long gamma positions look attractive (1 month EUR/SEK straddle at 9.25 is roughly 1600 SEK pips). The risk for Swedish FX interventions increase fast should EUR/SEK trade through 9.00 before CPIF is at or close to 2% target. You can also find our research materials at our website: www.mb.seb.se. 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.
SEB FX Ringside 25 November 2015 Speculative accounts have been buying the ECB/Fed rumour will they sell the fact? Author: Karl Steiner By analysing how speculative accounts have positioned themselves lately and how EUR/USD has fallen since mid-oct, it is evident that market actors are buying the rumour of diverging monetary policy with additional ECB stimulus as well as a Fed hike in December. As buy the rumour-sell the fact is a common behavioural phenomenon, this is a contrarian signal for EUR/USD past the Fed rate decision. Such an outcome would be in line with the general pattern around the start of Fed rate hike cycles. But it also indicates a significant risk for a short squeeze should the central banks dodge expectations. EUR/USD lower since mid-oct. As expectations of further stimulus from ECB and a Fed hike in December began to increase around mid-oct (and especially after the ECB meeting Oct 22, Fed meeting Oct 28 and strong NFP Nov 6) EUR/USD has fallen from close to 1.15 down to 1.06. This price trend in itself shows that the market is positioning in accordance with the expected divergence in monetary policy. EUR/USD falling since mid-oct Speculative positioning indicates strong confidence in the divergence expectation. Also when analysing speculative accounts positioning (using CFTC s weekly commitment of traders report) it becomes evident that the market is confident and is positioned for a divergence in monetary policy. In only four weeks speculators has more than doubled a relatively small net short EUR/USD position of 63k contracts and as of Nov 17 holds a net short position of 164k contracts. The largest part of that change comes from specs adding short contracts, which is evident when looking at how much their share of open interest has increased during the same period. Positioning in EUR is still far from the large net shorts seen in March (and is just below its 52 week median) but the change has been quite sharp. Amount of EUR (vs USD) contracts held by specs The aggregated net long USD position* has increased sharply lately. From a yearly net long low of 120k contracts just before the ECB meeting in Oct, speculators where on Nov 17 (four weeks later) sitting with a net long USD position of 411k more than three time as large! That build up is massive and has brought positioning from percentile 0 (least net long in a year) all the way up to its 78 th percentile which is the 11 th largest net long USD position the past year. Thus clearly speculative accounts have positioned themselves in line with the expectations ( rumour ). Another indication of speculators being confident and increasing their FX exposure is that the total amount of contracts held by speculators reached a record high level last week. Question is what happens if the rumour becomes fact? Judging by past occurrences and general buy the rumour/sell the fact behaviour indicates that EUR/USD should head somewhat higher for a period. Such an outcome would be in line with the general pattern around the start of Fed hike cycles (see chart below). But what if ECB and Fed dodge expectations? Then current positioning indicates a clear risk for a short squeeze which would take EUR/USD quickly and painfully higher. EUR/USD development around starts of Fed hike cycles 4% 2% 0% 2% 4% 6% 8% 10% 12% EUR/USD change around starts of Fed rate hike cycles 0% = EUR/USD level 100 days ahead Rate decision 100 90 80 70 60 50 40 30 20 10 0 10 20 30 40 50 60 70 80 90 100 Days before and after the rate meeting which started the rate hike cycle 1994 1999 2004 Average * Aggregated position for all G7 currencies plus MXN vs USD 4% 2% 0% 2% 4% 6% 8% 10% 12% You can also find our research materials at our website: www.mb.seb.se. 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.
FX Ringside FX recommendations B/S 25-Nov Price obj. Stop P/L Start val / Start date EUR/SEK Sell 9.26 8.90-1.44% 9.40 27-Oct GBP/SEK Sell 13.17 12.50 - -1.15% 13.02 27-Oct FX Forecasts SEB Forecasts Action levels 25-Nov 1m Q4 15 Q1 16 Q2 16 Q3 16 Buy Sell EUR/USD 1.0597 1.05 1.05 1.02 1.00 1.01 1.00 1.09 EUR/SEK 9.2648 9.20 9.15 8.85 8.80 8.75 8.90 9.40 USD/SEK 8.741 8.76 8.75 8.68 8.80 8.62 8.45 8.95 EUR/NOK 9.1704 9.40 9.40 9.40 9.25 9.00 9.05 - USD/NOK 8.652 8.95 8.99 9.22 9.25 8.87 - - NOK/SEK 1.010 0.98 0.97 0.94 0.95 0.97 0.95 1.03 GBP/USD 1.5068 1.50 1.51 1.46 1.41 1.41 - - EUR/GBP 0.7033 0.70 0.69 0.70 0.71 0.72-0.75 GBP/SEK 13.17 13.14 13.17 12.64 12.39 12.15 12.00 13.10 EUR/CHF 1.0821 1.09 1.10 1.11 1.12 1.13 1.07 USD/JPY 123 121 122 123 127 130 119.00 130.0 EUR/JPY 130 127 128 125 127 132-140.0 AUD/USD 0.7257 0.70 0.67 0.64 0.65 0.65 0.65 0.720 USD/CAD 1.3313 1.34 1.36 1.37 1.33 1.30 1.28 1.35 EUR/PLN 4.262 4.30 4.33 4.30 4.10 4.07 EUR/HUF 312 312 320 317 306 303 USD/TRY 2.888 2.95 3.15 3.00 3.00 3.05 USD/RUB 65.8 65.0 67.0 70.0 71.0 72.0 USD/CNY 6.39 6.47 6.60 6.60 6.40 6.50 USD/KRW 1143 1186 1240 1240 1200 1220 USD/SGD 1.406 1.43 1.47 1.46 1.41 1.44 Central Bank forecasts Sweden Norway USA EMU Japan UK Canada Switzerland Base rate -0.35% 0.75% 0-0.25% 0.05% 0.10% 0.50% 0.50% -0.75% Next meeting 15-Dec 17-Dec 12-Dec 03-Dec 18-Dec 10-Dec 02-Dec 10-Dec Action expected -0.10% -0.25% 0.25% easing QQE unch unch unch Next change Q4-16 Dec-15 Jun-16 --- Apr-16 May-16 --- --- Direction hike --- +25 bps --- increase +25 bps hike ---