If the ECB begins to signal a more hawkish shift, as expected, this could take some pressure off both the Riksbank and Norges Bank, BofAML strategists write in a client note.
Here are the most interesting headlines taken from the note:
- Don’t expect tightening from either central bank any time in the near future, but a softening of rhetoric could allow both NOK and SEK to correct some of the recent and unjustified weakness
- With the next Riksbank meeting not until mid-June, the ECB meeting June 8 could be more significant for SEK
- For SEK, a potential replacement of Stefan Ingves as Riksbank Governor will draw increased market attention; in the last two extensions of easing, he had to use his vote to break a tie
- SEK remains undervalued and both the domestic macro and the global growth and inflation outlook should support SEK
- For NOK, take some comfort from the fact that hedge fund selling has abated; positioning is close to neutral, and the near-term path for NOK will likely be heavily influenced by oil price developments
- As the ECB prepares markets for QE tapering, this could take some pressure off Norges Bank, allowing it to gradually remove its easing bias as the economy continues to improve
- Maintain a positive path in both currencies in the medium term, looking for EUR/SEK at 9.30 and EUR/NOK at 8.80 by year- end
As we can see, Bank of America thinks that the Scandinavian currencies could gain in the aftermath of the ECB’s meeting. That may be true. First of all, the European currency gained sharply recently in anticipation of the meeting. That limits a scope for a hawkish surprise and could be a risk for the euro even if the ECB leans slightly hawkish. Secondly, the net positioning in euro is at highest level in years and that is also a risk factor for the euro. After all going long SEK or NOK could be an interesting idea.
EURSEK gained sharply today as the upward channel remains intact. However, a move towards 9.80 could be an interesting spot to go short if SEK is to strengthen post ECB’s meeting.