FX Watch – Changes to our conviction views

door: Georgette Boele , Roy Teo

  • We have removed the Swedish krona long position of our high conviction list
  • … but we have added a short position in the Australian dollar versus the US dollar

Monetary policy expectations hurt the SEK…

We have removed the Swedish krona long position of our high conviction list. The Swedish krona was on our list versus the euro, because we judged that financial markets had gone too far in pricing in monetary policy easing by the Riksbank. Moreover, we judged that the Swedish krona, which tends to be leveraged to the global cycle, would strongly benefit from a pickup in global growth we expect. However, the SEK strongly underperformed the euro since we have put it on our high conviction list on 20 November 2013. Why? Swedish inflation has undershot expectations and the Riksbank surprised financial markets today by cutting interest rates by 50bp to 0.25% compared to a market consensus of only a 25bp cut to 0.50%. What is more, the Riksbank adjusted its view of future repo rate-path dramatically downwards. As a result, increases in the repo rate are not expected to begin until the end of 2015 (see graph below).

Riksbank

…we have removed the SEK from our high conviction list and adjusted forecasts

Even though the Swedish krona was already on the defensive ahead of the rate decision, this surprise decision triggered another sell-off. We have reviewed our Swedish krona call. We have adjusted our forecasts in EUR/SEK for the end of 2014 to 9.25 in EUR/SEK (from 8.25) and for the end of 2015 to 8.75 (from 8.00). We have also removed the Swedish krona from our high conviction list with a negative total return of 4.2%.

Reinitiate short AUD as high conviction view

The Australian dollar (AUD) has been stronger and more resilient than expected due to the low volatility environment, which has supported carry trades. However, drivers for a weaker AUD have increasingly aligned. First, the divergence between the AUD and Australia’s key commodity export price, iron ore has continued to widen. Second, interest rate differentials between Australia and the US continue to imply a weaker AUD. Third, speculative long futures positions are increasingly overcrowded. Fourth, the rebalancing in the Australian economy has slowed in the second quarter and the trade balance has deteriorated since April. Fifth, though not our base case scenario, the RBA has signalled that should the recovery in consumer sentiment and a weaker exchange rate not materialise, further monetary stimulus could be warranted. Last but not least, we also believe that the US Federal Reserve will have less flexibility to remain dovish as economic data continue to improve later this year. The market is surprisingly more dovish than the latest FOMC interest rate projections. As we expect more rate hikes than the Fed, we believe that there is further catalyst for the US dollar to outperform the AUD later this year. At the time of writing, we initiate a short AUD/USD position at 0.9370 with a year-end target of 0.85. On 5 February we had removed this position of our high conviction list (see below).

high conviction