Buy EUR/SEK downside through 4 months Risk Reversal 8.65 Eur put (1x) vs 8.9050 Eur call (1.5x)
We have long awaited a better entry level to recommend to again sell EUR/SEK (ideally at 8.70/8.75 which we had this morning). The move higher in EUR/SEK yesterday and overnight to us appears to be flow related rather than based on new information. We expect Riksbank next week to cut rates (almost fully priced) but to also indicate a flat repo rate path going forward (remember again Riksbank is one of few central banks projecting a stronger currency). Furthermore it seems more likely that the ECB is approaching a rate cut early next year which should weigh on the EUR (more info in FX Ringside this week). Sentiment as regards Swedish data is currently very depressed and although fully expected, the QE4 program by Fed should marginally boost fundamentally strong currencies on the expense of the G4 currencies. We expect global growth to cautiously pick-up in 2013, a scenario which traditionally has been SEK positive. We estimate that Swedish corporates and institutions are still preferred SEK buyers on weakness as their FX exposure is historically high. We are targeting lower levels for all forecast periods in EUR/SEK going forward with 8.30 expected mid-2013. Our short-term regression model is also seeing more room for EUR/SEK depreciation.
We reinstate a short EUR/SEK through a Risk Reversal selling a 8.9050 Eur call / Sek put (1.5x notional), buying a 8.65 Eur put / Sek call (1.0x notional). At current spot (8.6975) the RR is zero cost.
SEB