Global Rates: Scandi Central Banks and noisy UK politics
The desk highlights that recent discussions surrounding the Riksbank and Norges Bank meetings are pivotal for Scandinavian rate markets, especially in light of unexpected fluctuations prompted by UK political dynamics. Per the full note from J.P. Morgan, the emphasis on these central bank meetings indicates a potential shift in monetary policy that traders should closely monitor. Furthermore, as regional concerns arise, investors are recalibrating their positions based on these pivotal insights, suggesting an evolving landscape in both Swedish and Norwegian markets during this period of heightened political noise. The backdrop raises critical questions about the trajectory of Scandinavian currencies as interest rates may become more diversified amid the broader European political environment.
What the desk is arguing
The desk maintains that the implications of the Riksbank and Norges Bank meetings will notably influence Scandinavian market dynamics, particularly given the backdrop of UK political uncertainty. Per the full note source, such high stakes related to interest rates are underscored by the recent volatility observed in these currencies.
The discussions during the meetings this month will provide crucial insights into the future direction of monetary policy in Scandinavia. With potential shifts in policy, it will be essential for traders to pay close attention to statements and decisions made by both central banks to gauge how these developments might impact currency values.
Where it sits in our coverage
With a consensus target of 1.075 for the SEK/NOK pair and a range between 1.04 and 1.12, the desk's view reflects anticipated movements across Scandinavian currencies effectively. Specific firms have outlined their targets: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns closely with jpmorgan's stance, reflecting a consensus belief that the SEK/NOK pair will trudge closer to the higher end of this expected range, given the ongoing political developments and central bank deliberations.
How other firms see it
Several firms are synchronized in their expectations of a cautious approach from the central banks, indicating a broader agreement among traders about the current climate. On the contrary, bofa presents a more conservative estimate, suggesting lower targets might prevail based on prevailing political risks.
Observations of EUR/USD movements will provide critical context for understanding the spillover effects anticipated from the Riksbank and Norges Bank meetings, especially as shifts in investor sentiment occur in response to political tensions affecting the UK and broader Europe.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Scandinavian rate markets are highly influenced by recent central bank meetings.
- 02UK political dynamics add noise and may impact investor strategies in Scandinavia.
- 03Consensus builds towards higher expected targets for the SEK/NOK currency pair.
- 04Moving forward, close monitoring of both central banks' statements is crucial.
Market implications
Traders should watch closely for cues from the Riksbank and Norges Bank meetings, particularly indications that may push the SEK/NOK past the 1.10 level. The upcoming political developments in the UK could also act as a volatile catalyst, influencing broader market sentiment and positioning in the currency pair.
Risks to this view
Any unexpected announcements from the Riksbank or Norges Bank could invalidate the current bullish sentiment, especially if they indicate a more dovish approach. Political stability in the UK could also counterbalance the expected volatility, reversing current trends in the Scandinavian markets.
Hi, and welcome to At Any Rate, James Morgan's global research podcast series, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currencies and commodity markets. I'm Francis Diamond from European Rate Strategy at James Morgan, and today I'm joined by my colleague, Yandere Gupta, to discuss the Riksbank and Norwich Bank's meetings over the last two weeks, as well as the recent media noise around a possible Labour Party leadership contest in the UK. So, both the Riksbank and Norwich Bank have delivered what we could call a hawkish cut, taking rates to 1.75% and 4% respectively, and it looks like the bar for further rate cuts has risen.
Scandinavian yields have increased across the curve, with decent underperformance of NIBOR yields relative to both STIBOR and URIBOR over the past week or two. So, let's start with the Riksbank, Yandere. The 25 basis point cut was in line with our expectations, and it looks like the projected rate path now suggests the Riksbank will keep policy rates pretty much unchanged at 1.75%.
So, what are markets pricing for the Riksbank from here? Hi, Francis. Yeah, the Riksbank cut was in line without expectations, but that was not a consensus call.
The STIBOR curve was pricing around, you know, 10 basis point of cut going into the meeting. Interestingly, there was one descent to the cut, where Deputy Governor Siem preferred to hold rates at this meeting. The rate path now shows zero probability of further cuts and a small probability of a hike in 4Q26.
We'd like to remind our listeners that the Riksbank has previously warned or instructed not to place too much weight on longer term forecast. The board owns the forecast for the next three quarters, whereas further out, the staff does the forecast beyond that. So, on the face of it, the rate cut decision appears surprising as core inflation, which we assume as CPI of inflation X energy, is now close to 3%.
However, on a forward-looking basis, this is expected to decline swiftly as base effects from earlier weight changes fade next year. Additionally, the recent government decision to temporarily reduce VAT on food from 12% to 6% would push core inflation below 1% by mid next year. So, and of course, this is all a one-off effect, but we continue to see that risks to Swedish inflation and growth remain stilted to the downside.
Nevertheless, the bar for the Riksbank to deliver further cuts is very high, and in my mind, it will require proof of weak activity, labor market, and inflation data to push them towards another cut, let's say in the next few months. The Stiber curve is pricing broadly unchanged rates over the next few months, which is in line with our expectations, and then it steeps, and then it slopes upward, which is typical of a on-hold cycle. Now, we believe that this environment is conducive for carry trades, especially at the front end of the curve, where we have a strong conviction on the central bank staying on hold for the next few months.
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