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FxWirePro: does growth divergence lead to policy divergence in scandis? – stay short in DKK/SEK to mitigate currency divergence risks
Source: FxWire Pro - Insights & Views / 02 May 2016 13:38:17 Europe/London
The Swedish economy advanced a seasonally adjusted 1.3% on quarter in the three months to December of 2015, following an upwardly revised 1% growth in the previous period and beating market expectations of 0.7%. It was the fastest growth rate since the fourth quarter of 2010, as both domestic and external demand contributed to growth.
While, the Danish economy advanced 0.1% on quarter in the last three months of 2015, rebounding from an upwardly revised 0.6% contraction in the previous period but lower than initial estimates of a 0.2% expansion
The growth divergence will be reflected in a fall to 1.10 over time. The Swedish economy is expected to see 3.5% GDP growth this year, marginally down from last year’s 3.8% but still on a different level from the rest of Europe.
On the contrary, in Denmark, where a consensus forecast of 1.6% growth may be optimistic, at least judging by the finance ministry’s revision to 1.1%.
As rising oil prices push headline inflation slowly back up in Sweden, how long can the Riksbank policy of negative rates last against this kind of growth backdrop?
While EUR/SEK’s further gradual fall is projected as the stress on the Riskbank is developed.
Meanwhile, the EUR/DKK link, remains in place and is not under pressure, but growth divergence could put it under some pressure.
Risk profile: Risks Risk aversion, housing market slows sharply in Sweden Global risk aversion tends to cause SEK to weaken relative to EUR, so this trade will work badly in a major sell-off.
The longer the Riksbank keeps policy too easy, the greater the risk that eventually, the housing boom becomes unsustainable.
Trading Tips:
Look for drift to DKK/SEK 1.20 near term, 1.10 over 18 months.
At spot ref: 1.2337, stay short in DKK/SEK futures contracts of far month expiries.
3-month target 1.20, 18-month target 1.10, stop 1.2550.
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