NOK & SEK: Hawks soar - HSBC

Analysts at HSBC are retaining their bullishness on both the NOK and SEK after both currencies enjoyed strong rallies against the USD during July, perhaps as acting as cheaper proxies for a EUR that was looking increasingly stretched.

Key Quotes

“The momentum in selling has petered out somewhat in August and we suspect further gains would be better played against the EUR rather than the USD for now.” 

“The SEK’s performance is likely to hinge mostly on the Riksbank factor. The central bank meets on 7 September and the question is how much their tone changes. On the face of it, a shift towards a more hawkish stance would seem an obvious outcome. After all, the latest GDP data (for Q2 17) shows the economy is running at 4.0% in YoY terms. Inflation was above target at 2.2% in July and well ahead of the Riksbank’s expectation of 1.6%. Upward revisions to growth and inflation forecasts are likely.”

“Yet judging by Bloomberg reports, many market economists believe the Riksbank will be unlikely to change its tone from neutral to hawkish. They argue that the higher inflation rate is due to one-off targets that the central bank will look through. They also expect some caution as the central bank will be highly reluctant to repeat past mistakes and tighten prematurely. Moving to a more hawkish stance will not be done lightly. This line of argument may explain why EURSEK failed to extend its sell-off when it broke below 9.50 in the wake of the CPI data.”

“But such cautious expectations may be overdone, we believe. The Riksbank will adopt a more flexible mandate beginning at its September meeting, which will target a 1-3% range rather than a fixed 2% target. They will target inflation excluding interest rate costs (CPIF) rather than CPI. This is currently running at 2.4% YoY. In addition, higher inflation and GDP forecasts may encourage them to give more prominence to financial stability considerations, which would warrant a less dovish stance. Given our wider expectations for some short-term weakness in the EUR, we would expect EUR-SEK to push decisively below 9.50 and potentially challenge support at the year’s low of 9.4092.”

“For the NOK, the story is similar, although perhaps less potent. Growth is strong with business confidence at a 4-year high and the manufacturing PMI at 10-year high. Inflation likely bottomed in July. In addition, financial stability is a notable concern for the central bank, which they believe already warrants higher rates. Indeed, the Norges Bank has noted in the past that it prefers to use rates rather than macro-prudential rules to rein in house prices and household debt. The next policy meeting is not until 21 September, a rather distant prospect for a tactical view. Nonetheless, we would expect EUR-NOK to challenge key support at 9.25 in the coming month and would sell USD-NOK on any test of 8.00.”