News & Analysis

After a relatively uneventful beginning to the week, G10 FX has offered some interesting moves today…

The dollar is lower across the board, with the price action broadly following a risk on tone: NOK and SEK are the best performers, and NZD is the worst. The Kiwi dollar is the worst performer out of the G10, having suffered this morning before rallying against the US dollar. June WTI contracts plunged close to $10 a barrel, after S&P Global decided to force an early roll-over in the West Texas Intermediate index, triggering selling in the June contract in favor of July.

A few additional thoughts on today’s price action:

  • As always it’s tempting to look for meaning in intraday price action. The most likely explanation of today’s dollar weakness seems to be a broad improvement in risk appetite. However, the week is yet young, and with tomorrow’s FOMC meeting giving the Fed a chance to set the parameters of its monetary easing and timely covid-inclusive data being released for a number of economies, dollar bears will have plenty of chances to reassess.
  • July and August WTI contracts are both up more than 2% on the day, suggesting that for now markets, are happy with a $20-30 clearing price for crude futures and there are no new concerns of another serious leg lower for US crude prices.
  • NZD’s underperformance today comes after Westpac Chief Economist Dominick Stephens said in a note he expected more easing, including negative rates, from the Reserve Bank of New Zealand. NZD OIS traded lower today, deviating from broad trends elsewhere in the G10. Implied probabilities of an RBNZ rate cut rose. If the RBNZ did cut rates into negatives it would be a significant departure from the Bank’s strategy and that of the Fed, BoE, RBA and BoC which have preferred asset purchases to negative rates.

 

SEK rallies after Riksbank hold

The Swedish krona ripped over 1.5% higher against USD and over 0.4% against the euro this morning after the Riksbank left its key interest rate unchanged at 0.00%, as it “was not deemed justified at this point in time by lowering the repo rate when the downturn in the economy is due to imposed restrictions to try to increase demand and people’s concerns about the spread of infection”. The MPC also stated that the decision does not rule out the possibility of a rate cut at a later date, although in statements that were released prior to the COVID-19 crisis, the Riksbank projected no change in rate for 2020 and 2021.

Governor Stefan Ingves has repeatedly waved off the need to return to negative rate policy after ending the 5-year streak of NIRP in December. The statement however mentioned that, despite the uncertainties in markets, everything indicates that:

monetary policy stimulus will be needed in the form of low interest rates and a large amount of liquidity for the foreseeable future.

The Riksbank cut their yearly inflation forecast from 1.3% down to 0.6% and designed two scenarios rather than one detailed forecast in order to account for the unpredictability in markets. The first scenario sees an inflation rate of 0.6% and 1.5% in 2020 and 2021 respectively, while GDP growth is expected to be -6.9% in 2020 and 4.6% in 2021. The second scenario foresees a slower pickup of the economy and includes an inflation rate of 0.6% and 1.3% in 2020 and 2021, while GDP growth is expected to fall by 9.7% in 2020 and rise by 1.7% in 2021. The eventual outcome will depend on the further spread of the virus and the timing of the easing of restrictions, although Sweden already stands out for its mild response to the virus in terms of containment measures compared to other countries.

Riksbank’s Ingves stated in the press conference that the central bank’s main focus now is to safeguard credit supply rather than cutting rates, but mentioned that the Riksbank is ready to more do if and when needed. The Riksbank launched an asset purchasing programme of SEK 300 bln back in March and bought SEK 3 bln of that existing programme today.

The Riksbank’s announcement today led to a rally in the Swedish krona against both USD and the euro and coincided with the Swedish retail sales release from March that surprised to the upside. Month-on-month sales decreased by 1.7% compared to the expected decrease of 3.0%, while the prior reading was 0.2%. Year-on-year retail sales printed positive at 0.6%, well above the consensus of -1.0% but below the prior reading of 2.8%.

 

Chart: Swedish krona rallies after Riksbank announcement

 

With most shops and restaurants still being opened in Sweden, the retail sector took the hit better than other countries that did implement a full lockdown. The question now for the Swedish krona is the extent of economic contraction spurred on by the impact of the coronavirus, and whether more monetary stimulus will be necessary to revive the Swedish economy.

 

Authors: 
Ranko Berich, Head of Market Analysis
Ima Sammani, FX Market Analyst

 

 

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