SEK Under Pressure
Risk assets rebounded in the European session, taking the AUD and other risk currencies along with them. EURSEK pushed higher after soft CPI numbers (the headline rate expanding just 0.4% yoy) and comments from the Finance Minster Anders Borg that the krona is too strong versus the euro and he ‘wouldn’t be sad if it weakened’. While the broader view is that EURSEK remains within ‘fair value’ estimates, this marks a slight turnaround from Borg. AUD pushed higher despite some soft labour market data prints. The unemployment report for September came in soft, according to our Australian economics team. Employment rose +14.5k (cons. +5k), led by increases in full-time employment. However the unemployment rate increased significantly to 5.4% from 5.1% – which reinforces the view of our economists that the path is now clear for the RBA to cut the cash rate again in November. However, AUD’s move higher illustrates its role as a wider barometer for risk appetite and the move higher in equity markets remains the key driver for now. USDJPY also pushed higher on announcement of a potential M&A deal. At the end of yesterday’s US session, S&P downgraded Spain’s sovereign rating by two notches to BBB-. EURUSD was slow to react, but eventually fell 30 pips. The ratings agency cited deepening economic recession and rising unemployment which are limiting the government’s policy options and adding to the frictions between the central and regional governments. S&P further noted that the hesitation of the government to request a bailout increases the downside risks to Spain’s rating, which remains on outlook negative. We think the announcement has hurt the euro as much as it is going to though, given: (1) no important levels in the ratings table were crossed and (2) the downgrade arguably marginally raises the likelihood that Spain will request a rescue sooner rather than later, which would fulfill one of the necessary conditions for the ECB to begin bond buying. Besides, we see the Moody’s ratings review, due to complete this month, as a greater risk to the euro, as a possible downgrade would put Spain’s rating into junk territory. The Fed’s beige book noted that employment conditions were little changed since the last report. The lack of material improvement (despite the September household survey showing a drop in unemployment rate to 7.8%) highlights the risks of further Fed easing in December.
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UBS Investment Bank