- Swedish inflation data released this morning was lower than expected. CPI declined 1.2% m/m and 0.2% y/y in January, which is 0.3 percentage points below the Riksbanks forecast both on m/m and y/y numbers.The low numbers clearly increases pressure on the Riksbank to deliver another cut, and we stress that near term outlook for EUR/SEK remains skewed to the upside. In addition, or economists expect that this gap only will increase in the coming months and we acknowledge that today’s low prints indeed has increased the likelihood of another rate cut in Sweden.
- Bank of Japan (BoJ) in connection with today’s monetary meeting kept its QE programme unchanged but expanded its funding for lending facilities markedly. The BoJ doubled the size of its funding for lending facilities and also extended the maturities of these lending facilities. While today’s move is not a big easing one, it nonetheless underscores that BoJ continues to have an aggressive easing bias. Notably BoJ’s statement on the economy and risks was unchanged from January, so on the surface it does not appear that BoJ has changed its view on the economy on the back of the disappointing Q4 GDP data released yesterday. However, the recent appreciation of JPY has been unwelcome and today’s easing move underscores that any substantial appreciation of JPY will probably be met by a relatively fast policy response from BoJ.
- In FX Strategy: Why EUR/USD downside may be delayed (17 February), we discuss what we see as the main ‘risk scenario’ for our downward EUR/USD profile for 2014. While our baseline scenario remains an ECB cut in both the refi and deposit rate in March (or April) and for the Fed to go on with tapering despite bumps on the road to recovery, we acknowledge that risks are now increasingly on the upside for EUR/USD and these stem from both the Fed and the ECB outlook: ECB may not cut if disinflation is seen as mainly supply-driven and Fed may pause tapering if softness in US data continues. We conclude that the likely FX implications of this so-called risk scenario are that EUR/USD downside may be delayed and that AUD, GBP and, possibly, NOK are prime candidates for upside against USD. Moreover, a tapering pause is also likely to be positive for risk assets and emerging markets (EM) and thus could induce some (further) EM stabilization despite the prospect of continued weakness in Chinese data in the months ahead. For that reason, we decided yesterday to take an early profit on our short 3M EUR/PLN 4.19 straddle that we recommended in FX Market Update on 06 February. We closed the position and booked a profit of 0.46%.
Danske Bank