Today attention turns to Scandinavia with the Riksbank meeting as the main event. Our view is that rates and the rate path will be kept more or less unchanged. However, risk is tilted to a softer report, especially if the Riksbank focus on the low price pressure in services. The annual address by Norges Bank Governor Olsen tonight will be followed closely as well but we doubt it will contain anything market relevant. If anything, Olsen will confirm that Norges Bank is on hold contrary to the money market seeing a probability of a rate cut. Hence, further support to NOK is likely today. Currently, a certain divergence between Norway and Sweden is seen. Norwegian growth were stronger than expected in Q4 2013, whereas Swedish growth may have been flat in the same period when the data are published February 28. The same goes for inflation. Norwegian core inflation surprised on the upside in January, whereas Swedish inflation might do the opposite when the numbers are out on Tuesday. All in all we still like the upside for NOK/SEK.
AUD/USD took a hit overnight and went below 0.90 again after a dismal unemployment report showed continued job losses in the economy. We continue to see potential for the Aussie to head lower as the still strong level of the currency remains a key headwind for the non-resource sector. Although the Reserve Bank of Australia (RBA) has recently scrapped its saying that AUD is “uncomfortably high” the central bank will still not tolerate much strength from current levels before action will be looming. With the prospects of still soft Chinese data ahead and a Fed on autopilot AUD/USD should head lower on a 1-3M horizon.
Judging from the market reaction yesterday Mark Carney and the Bank of England did not deliver the dovish message expected by some market participants. The shift away from threshold-based forward guidance to a more qualitative guidance around the level of spare capacity in the economy was met with a significant sell-off led by the 2-3Y segment of the 1Y forward curve. And EUR/GBP dropping close to one big figure to below 0.82. Given that we expect the ECB to ease monetary policy further in the spring, we continue to see downside for EUR/GBP the next couple of quarters. Also note that ECB’s Coeure yesterday said that a negative deposit rate is seriously considered by the ECB. The latter is exactly the reason why we forecast more downside for EUR/GBP in the spring. In the ECB they are discussing more easing, whereas the BoE is basically now discussing, when to start raising rates. In respect of the probability of further ECB easing the ECB today publishes its monthly bulletin. This time it will include the Survey of Professional Forecasters where focus will be on the long-term inflation expectations, which are currently at 1.9%. This is the survey the ECB refers to when it calls inflation expectations well anchored – making it very important for the ECB. If it falls to 1.8%, it would put pressure on ECB to ease policy further and weigh on the euro.
Danske Bank