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EURNOK: Even though the NOK has become a G10 carry high-scorer, NOK weakness has continued relentlessly over the past month. Arguably, an important reason for the weakness lies in the negative terms-of-trade shock that Norway has experienced this year from falling gas, oil and salmon prices. This in turn has driven a heavy underperformance of Norwegian equities, which generally deliver energy and inflation exposure to markets – exposures that the global environment does not favour currently.
Finally, M&A activity, poor liquidity and technical levels have also contributed to the magnitude of recent NOK weakness. Fundamentally, we believe the latest weakness has gone too far but we acknowledge that there are few imminent triggers for a turnaround. Indeed, year-end fears are likely to keep foreign demand low for now. NOK correction potential is on the cards but it is likely we need to see a substantial change in the global investment environment before this happens. EURNOK forecast is raised higher to 10.10 in 1M (from 9.90), 10.10 in 3M (previously 10.00).
EURSEK: We still see no scope for a sustained turnaround in the SEK and maintain our bearish view based on a cyclical slowdown and subdued inflationary pressure. We have a hard time seeing the Riksbank actually hiking, on top of the above, in the same global economic environment where most importantly the ECB, but also the Fed, has eased policy.
Hence, the Riksbank is expected to postpone the rate hike planned for year-end and even though timing is tricky, we still see the Riksbank cutting rates in February 2020. However, the recent uncertainty regarding the labour market might buy the Riksbank some more time before it acts.
Overall, The projection is raised to 10.90 in 1M, 11.00 in 3M and 11.20 in 6-12M and stick to this here.
Accordingly, USDSEK vs EURSEK vol spread has been activated as a positive vol carry RV expression via long 2M USDSEK 9.96/9.13 strikes strangle @7.75/8.4vols vs short 2M EURSEK straddle @5.65ch, pays 85bp SEK, not delta hedged; spot reference: 9.63 and 10.725, respectively. Courtesy: Danske
