In view of the analysts at Nomura, markets were slightly disappointed by Riksbank’s dovish stance and no change in forward guidance by ECB, in their respective meets yesterday.
Euro and ECB
The market started the week on a positive note following Emmanuel Macron’s success in the first round of the French elections. The market has largely priced out the possibility of Marine Le Pen winning in the second round on 7 May, rightly so in the bank’s view. What’s more, Nomura entered long EUR/USD positions on Sunday night, and expect EUR/USD to move towards 1.15 by year end.
The strength of the Eurozone economy and their expectations for gradual ECB normalisation are key factors behind this view. However, the bank did not expect President Draghi to announce a change in the ECB’s forward guidance yesterday, and markets were slightly disappointed when he said no discussions about changing forward guidance and about the exit strategy had taken place at the meeting. He also said there was no need to discuss forward guidance sequencing at the moment. Nomura sees this as a good opportunity to buy the euro on dips.
Nomura went long on the EURUSD with a target at 1.1500.
The Riksbank this morning also came out on the dovish side, in line with Nomur own expectations but catching the market off-guard. SEK depreciated around the meeting, with deposit rate projections pushing back the timing of the first hike and a SEK15bn QE extension. Longer-term, the bank maintains its constructive view on SEK. Strong growth domestically and abroad, the ECB turning more hawkish and inflation recovering should see the Riksbank turn more hawkish over the coming months. Governor Ingves is the one to watch, along with inflation prints as usual. That is why Nomura expects EUR/SEK to move lower as the ECB starts to discuss normalisation and 9.65-9.70 would be good levels to short EUR/SEK in their view. Medium-term USD/SEK shorts are also attractive from the 8.90-95 level.
Nomura sees 9.65 as a decent level to go short on the EURSEK.
There were also developments on the US politics front this week. The Trump administration stepped up its rhetoric on tax reform, presenting a modest set of guidelines for tax reform yesterday, which were scant on details. The key elements included a reduction in the top corporate tax rate from 35% to 15%, a shift to a territorial system for corporate taxes, a temporary tax reduction for the repatriation of profits earned abroad, a reduction in the number of personal tax brackets and a decline in the top rate to 35%. That said, the details provided were insufficient to assess the budgetary impact. According to our US economists, the announcements do not change their expectations that only modest tax cuts with little reform will end up being passed by Congress.