- This morning the Riksbank published Minutes from the February Monetary Policy Meeting. Despite the decision to keep rates was unanimous (we already knew that) we think the Minutes had a clear dovish twist. Especially, we note that the usual hawk Mr. Jansson seems to have moved in a clear dovish direction. He says among other things that he, “wished to make it clear that for him this will be [low inflation] the overriding priority in his monetary policy considerations in the year ahead. Against this background, he also thought that it would be necessary to consider further repo-rate cuts if the expected increase in inflation fails to materialise.” Furthermore he stresses that, “… in this context he himself would primarily focus on the development of inflation. More specifically, he said that he will not vote for a repo-rate increase until CPIF inflation picks up and rises above 1.5 per cent. And if further progress is made in managing the risks associated with household debt he could imagine voting for an unchanged repo rate at today’s low level even with a CPIF inflation rate well over 1.5 per cent.“
- Hence, it seems that the Executive Board now have three members that focus primarily on inflation. That is the usual doves Ekholm and Floden and now also Jansson. They are ready to act, whereas Jochnick, Skingsley and Governor Ingves appears less dovish. Considering that the Board did not knew the low inflation numbers for January that came in 0.3 %-point below the Riksbank forecast the April Monetary Policy Meeting could be quite interesting. We have seen EUR/SEK moving marginally higher on this, but given the focus on inflation and our forecast for a weak GDP number on Friday we believe that the risk is still tilted to the upside for EUR/SEK.
- The Chinese Yuan (CNY) continues to weaken and the spot USD/CNY exchange rate at a level seen since August last year. Over the past week the cross has increased 1.0%. It appears that the weaker CNY has been actively encouraged by the PBOC and has not been driven by the capital flight out of China, as was the case in connection with a weaker CNY in June 2013. On the contrary, recent data suggests that China’s FX reserves have been increasing rapidly recently due to substantial speculative capital inflows fuelled by higher interest rates in China. In the interbank market, interest rates have dropped markedly over the past week, suggesting that USD purchases by the PBoC could have added substantial liquidity to the interbank market.
- Looking ahead, we expect the PBOC to maintain an easing bias in H1 14 and for that reason, we also expect it to maintain the previous pattern in connection with monetary easing and keep USD/CNY broadly unchanged. At this stage, we do not believe that CNY faces a more substantial devaluation, albeit with CNY no longer substantially undervalued, it cannot be completely ruled out.
Danske Bank