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Watching the ECB: SEK, DKK, CHF – Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 3, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Jane Foley, Research Analyst at Rabobank, suggests that the Sweden, Denmark and Switzerland have a lot in common and the economic outlook for all three is heavily dependent on the value of their respective currencies vs. the EUR.

    Key Quotes

    “As a result of that the central banks of all three countries have been forced into maintaining negative interest rates in an attempt to counter exchange rate appreciation. There are significant differences in the success rates of these policies. While Switzerland and Denmark posted sufficient growth to convincingly shrug off recession risk in the final months of 2015, the Swedish economy has been on a roll.

    GDP growth in Sweden in Q4 2015 registered a spectacular 1.3% q/q, 4.5% y/y. This compares with 0.2% q/q, 0.6% y/y for Denmark and 0.4% q/q, 0.4% y/y for Switzerland. Although CPI inflation in Sweden is still a moderate 0.8% y/y, it still compares favourably to the 0.6% y/y headline rate posted in Denmark in January and is in a different league to Switzerland deflationary CPI rate of -1.3% y/y. In our view the prime reason why the Riksbank has had so much more success in stimulating growth and inflation than its counterparts in Denmark and Switzerland is that it has managed to prevent its currency from becoming as overvalued.

    According to the OECD’s purchasing power parity model (PPP), the CHF is 36.2% overvalued vs. the EUR, the DKK is 24.5% overvalued and the SEK a less excessive 21% above fair value. That said, some PPP models rate the SEK up to 35% undervalued vs. the EUR. While there are significantly differences between models are to how much the DKK and the CHF are overvalued vs. the EUR, there is a broad consensus that they are both too strong; the Swissie by a very large margin.

    The Riksbank can claim that its tendency to pre-empt ECB policy moves over the past couple of years has played a key part in countering demand for the SEK. Its more recent threat to use FX intervention has also likely had an impact. That said, in the context of currency wars the Riksbank has a significant advantage over the SNB insofar as there is insufficient SEK liquidity for it to be considered a safe haven currency.

    The absence of safe haven inflows have in effect given the Riksbank far greater control over its own currency. Similarly negative rates should have a more forceful impact in chasing away demand for the DKK than the CHF. That said, the DNB was forced to repeatedly cut rates early last year as speculators tested the resolve of the EUR/DKK peg after the SNB gave up protecting the EUR/CHF1.20 ‘floor’. In view of its status as a safe haven currency the CHF is likely to respond better to the SNB’s negative interest rates and threats of intervention in periods of rising risk appetite.

    Even though SNB President Jordon recently suggested that “unconventional (monetary policy) measures cannot be deployed endlessly”, further policy action from the ECB on March 10 opens up risk that the SNB will also be required to announce a tit for tat response. The DNB increased its interest rates on CD in January by 10bps in an effort to unwind some of the frantic measures announced last January and in response to better levels of economic activity. That said, it will be watching the market’s reaction to any further ECB measures carefully.

    The fact that the EUR has itself been displaying safe haven characteristics since last summer has lent it support and brought some relaxation in the inter-European currency war. If fresh ECB policy measures fail to knock the EUR significantly, the pressure on Europe’s other central banks to act again also lessens. For the Riksbank this may be of particular relief. Amid strong growth and rising inflation, speculators may be willing to bet that further loosening in policy would lack credibility. A punt on a long SEK position could be a good long-term bet.”
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