Long NOK/SEK for a move towards 1.1000 – Danske Bank

Analysts at Danske Bank recommend a long NOK/SEK position for a move towards 1.1000 as housing, macro outlook and central banks hold upside potential in NOK/SEK, while they suggest that a key risk is if signs of a downturn in the Swedish housing prove a ‘false alarm’.

Key Quotes

“Delink the Scandies

• Signs of substantial price fall in the Swedish housing market are a possible game changer for the economy and thus the SEK. The SEK has been the first victim in the financial markets (in our view, rates markets have yet to price in housing risks on a wider scale), which helps explain the decoupling from our short-term interest rate models. In our view, the SEK will probably continue to reflect a significant housing risk premium for some time still and we expect growth deceleration and repricing of the Riksbank to continue to weigh on the curency in 2018.
• Valueguard/HOX data indicates that prices fell by 5% between the peak in August and October; high frequent data indicate an additional 4.4% decrease in November, which means the decline is accelerating. Barring an immediate stabilisation, it should eventually have material impact on residential investments and GDP growth. Moreover, if house prices fall significantly, households are likely to hold back on consumption (cf the ‘feelgood’ factor). Stricter regulation is yet another factor affecting this. We believe that GDP forecasts are generally too optimistic for 2018: indeed, we emphasise the downside risk to our own 2.0% GDP estimate and even more so to the Riksbank’s 2.7%. Similarly, there is also a non-negligible downside risk to our inflation forecast. As such, the cooling housing market makes another ill-timed headache for the Riksbank, as CPIF inflation heads lower.
• NOK and SEK have moved in tandem in H2 and there are indeed compelling arguments why both Scandi currencies have become victims of fragile housing markets but is it fair? Not necessarily. Admittedly, there are imbalances in both countries but 2016’s acceleration in Sweden relative to Norway suggests Sweden might be at greater risk for a more substantial correction. Notably, we believe that growth risks associated with housing are greater in Sweden and we note that the NOK has yet to take advantage of the positive terms of trade shock stemming from higher oil prices.
• The best predictor for NOK/SEK over time has been relative monetary policy. If relative yields are any guide, there is clear upside potential in NOK/SEK in our view. Too much is priced on the Riksbank and too little on Norges Bank. As discussed above, we do not see how the Riksbank could start raising rates as soon as next year. Given the fragility of the housing market, we believe future rates hikes should be very, very gradual. The market is pricing the first hike from Norges Bank around Q3 19, while we see it coming in Q4 18; this should generally lend support to the NOK.”

“NOK/SEK up on relative housing risks and Norges Bank-Riksbank decoupling

NOK/SEK offers good value for a strategic investor in our view: the outlook for housing, growth and monetary policy suggest that the cross is likely to move higher next year, and thus carry will remain in favour of the NOK. It is time to delink the Scandies. We recommend buying NOK/SEK at 1.0144 targeting 1.1000 which allows us to set the stop at 0.9850. A key risk to this trade would be if signs of a material downturn in the Swedish housing market prove to be a ‘false alarm’.”