Eye-Opener: No stopping the dollar, nor the ECB, we’ll see about Swedish inflation

The dollar continues to strengthen and this morning hit 1.0666 against the euro. The double impact from Fed expectations and ECB reality is at play.

This morning Chinese data for both industrial production and retail sales (6.8% and 10.7% y/y respectively) came in below expectations. As a consequence, Asian stock indices are down this morning.

Yesterday’s release of the NFIB index and the JOLTS report made it even more likely that the Fed will no longer describe its policy intentions as “patient” at the 17-18 March FOMC meeting. The data keep the possibility of a June rate hike in play.

In Denmark, inflation turned from negative to positive, as the February print increased to 0.2%, up from -0.1% last month. A large contribution from housing rents will keep Danish inflation relatively high compared to the Euro area going forward.

Norwegian core inflation came in at 2.4% in line with our forecast, but below Norges Bank’s view and the consensus at 2.5%. Norges Bank will conclude that current inflation is about as expected.

Day ahead

A relatively empty calendar today.

The main release is the Swedish inflation expectations survey from Prospera, probably the single most important statistic for the Riksbank.

In the latest outcome of this quarterly survey, inflation expectations on a 5-year horizon fell to their lowest level in 15 years and were an important reason behind the unconventional steps in February. The sharp drop in December seems to be a bit excessive, which suggests that price expectations will not fall further. We expect the CPI to be up by 0.6% m/m in February. The CPIF should come in at 0.7% y/y.


Day 2 of ECB QE was characterised by a new global low on German rates with the 10-year yield going as low as 0.23% yesterday. The rate drops were widespread yesterday with Italian, Spanish and Portuguese bond yields dropping 6-7 bp. Swaps lag the moves, however, so the Bund spread roared back to above 42 bp.

One thing is the immediate effect on core yields: down. Another is the resulting flows; after selling to the ECB, what do you as an investor buy. The ECB wants you to buy riskier assets, but they also hope that these assets will have their price tags in euros. Over recent months, however, foreign purchases in US rates have been sizeable and we have seen Treasury auctions where over half has been allotted overseas. A strong flow where investors realise a profit by selling to the central bank and then fleeing for the US is counterproductive to what the ECB wants, yet that is exactly part of what has driven some market spreads to very wide levels.

Given the above, US rates will struggle to break higher fast, and yesterday saw another reversal back to levels below 2.15% for 10-year Treasuries. It remains the case that the largest divergence between what the Fed sees in their dot charts and what the market implies isn’t on the first hike date, it’s on where the hike cycle ultimately ends. We continue to prefer paying further out on the US curve over the front.

Today sees 2-year German risk auctioned, and interestingly after having reverted to -0.2% on the ECB floor, the 2-year German yield has sold off by 5 bp. Soft floor indeed.


EUR/USD reached new lows since 2003 (1.0666) this morning, as the USD was broadly bought on the back of comments by the Fed’s Fisher that a strong USD is not a concern. Isn’t it? The markets start to question it. Now that ECB QE is ongoing, the focus turns to the Fed, and yesterday’s data suggest that the chances of a June hike are increasing. The market is still not pricing that in fully yet.

EUR/SEK challenged the uptrend again, around 9.17, but the market is cautious about bringing it lower due to expectations that the Riksbank will strike back. Indeed, we have received enough comments suggesting they would, and the Riksbank expanding QE is becoming an expectation weighing on the SEK.

The NOK was hit hard yesterday as inflation disappointed and Brent oil prices dropped sharply to below USD 57/bbl. The upside is capped by the 100 DMA (8.72), while on the downside EUR/NOK should be supported around 8.50, which coincides with the 200 DMA.

USD/JPY hit a new high yesterday (122), but it didn’t hold too long, as global stocks went down. The JPY is probably the only currency which is seen as “safer” than the USD right now, therefore declining stock prices should drag USD/JPY down. There are risks of a short-term correction to below 120 now. USD/JPY is in 121.30 this morning.