currency strategy: scandie parity as the usd climbs higher

8/22/2019 Currency Strategy: Scandie parity as the USD climbs higher

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You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and

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Scandie parity as the USD climbs higherWEDNESDAY

22 JANUARY 2014

In 2013, small, sound currencies with little debt stopped outperforming for several reasons.Mainly, non-G4 currencies were traded at very high levels, while some were overvalued. Theircentral banks responded by lowering rates (Australia) or through verbal interventions(Norway). Simultaneously, growth prospects finally improved in core countries such as the UKand US. We believe large, liquid currencies will continue to outperform in H1 2014, drivenprimarily by growth prospects and central bank expectations, as shown by our SEB FX

Scorecard. SEB still projects above consensus US growth of 3.3% in 2014. We think the USlabour market may improve faster than the Fed estimates, which may cause the bank toreduce QE3 more rapidly. As a result, we still expect EUR/USD to trade with a downside biasalthough the rate of depreciation will be slow as US monetary policy remains very relaxed. SEBalso believes the ECB will launch its own QE program later this spring. While portfolio inflowsmay anticipate this and seek to benefit from lower EMU yields, the euro should weaken onceQE is announced as it signals continued weak EMU developments. Consistent with two of ourtop trade recommendations for 2014, JPY and CAD have further weakened so far this year vs.USD. Following near-term consolidation, especially concerning JPY where speculativeaccounts are very short, we expect USD/JPY and USD/CAD trends to continue higher. Sterlingdepends on the BOE outlook. We see no convincing arguments why the bank should hikerates before H2 2015. NZD has performed extremely well and looks set to continue doing so,at least in the short-term. However, like the BOE we cannot see the RBNZ hike as marketscurrently discount. As these expectations recede, the Kiwi will weaken. Finally, Scandies stilldiverge. We maintain our lower NOK/SEK forecast. After some near-term consolidation inEUR/SEK, we expect the downtrend to resume as the Swedish growth outlook improves.

EDITORCarl Hammer+ 46 8 506 231 28

BUY THE CS BASKET We recommend buying a G10currency overlay basket with the following composition(based on the SEB FX Scorecard): Buy USD (30%), SEK(30%), EUR (18%), GBP (12%) and NOK (10%). Sell CAD(30%), JPY (30%), CHF (20%), NZD (19%) and AUD (1%).

SELL GBP/SEK Whilst Sterling is expected to maintaincurrent stronger levels short-term, we expect BOE to coolcurrent expectations on higher policy rates in UK before YE2014. We target a move back towards 10.20.

BUY 3MTH DNT IN USD/SEK. We expect continued range-trading (with small upside bias) in USD/SEK. A 3 month

6.75/6.25 DNT is approx. 28% of notional pay-out.

BUY USD/NOK We expect the Norwegian currency to beweak in-line with other commodity currencies. Although ourbase case is for no changes from Norges Bank 2014 thesurprisingly weak private consumption/falling house pricesand weaker petroleum-related investments may pushNorges Bank to cut rates. Foreign appetites for Norwegianassets also continue to be weak/negative.

- 1 - 0.8 - 0.6 - 0.4 - 0.2 0 0.2 0 .4 0 .6 0 .8 1

CAD

JPY

CHF

NZD

RUB

AUD

NOK

GBP

DKK

EUR

SEK

USD

CNY

SEB FX ScorecardTotal weighted score, 3-6 mth outlook



Currency Strategy

Forecasts and FX ScorecardFX forecasts

21-Jan Q1 14 Q2 14 Q4 14 Q1 14 Q2 14 Forecasts 2

EUR/USD 1.35 1.35 1.34 1.28 1.34 1.31 The big picture 5

EUR/JPY 142 142 145 143 141 140 USD 10EUR/GBP 0.82 0.83 0.83 0.83 0.82 0.81 EUR 12

EUR/CHF 1.24 1.24 1.25 1.26 1.24 1.24 JPY 14

EUR/SEK 8.80 8.75 8.65 8.50 8.90 8.80 GBP 16

EUR/NOK 8.37 8.40 8.45 8.50 8.25 8.25 CAD 18

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 AUD 20

USD/RUB 34.0 34.1 34.7 36.0 33.2 33.5 NZD 22

Cross rates CHF 24

USD/JPY 105 105 108 112 105 107 SEK 26

GBP/USD 1.64 1.63 1.62 1.55 1.63 1.62 NOK 28

USD/CAD 1.10 1.11 1.13 1.12 1.07 1.08 DKK 30

USD/CHF 0.91 0.92 0.93 0.98 0.92 0.94 RUB 32

AUD/USD 0.88 0.87 0.86 0.85 0.88 0.87 CNY 34

NZD/USD 0.83 0.82 0.80 0.75 0.82 0.81 Guide to indicators 36

USD/SEK 6.50 6.48 6.46 6.64 6.64 6.71 Internal FX flows 37

GBP/SEK 10.67 10.56 10.46 10.29 10.82 10.87 Contacts 38

JPY/SEK 6.21 6.17 5.98 5.93 6.32 6.27

CHF/SEK 7.11 7.06 6.92 6.75 7.18 7.10

NOK/SEK 1.05 1.04 1.02 1.00 1.08 1.07

USD/NOK 6.19 6.22 6.31 6.64 6.17 6.23

USD/CNY 6.05 6.06 6.02 5.90 6.21 6.17

*Bloomberg survey FX forecasts.

SEB Consensus* Contents

SEB FX G10 Scorecard, Medium TermWeights USD EUR JPY GBP CAD AUD NZD CHF SEK NOK DKK

Fundamentals 20.0% +3 +1 +1 +3 +1 +2 +3 +1 +1 +1 +1

Carry 5.0% -1 -1 0 -1 0 +1 +2 -1 0 0 -2

Mon. policy 20.0% 0 -1 -2 -2 +1 0 0 0 -1 0 -1

Flows 10.0% -1 +2 0 -1 -1 0 -2 +2 +1 0 +1

Valuation 15.0% 0 -1 +1 0 0 0 -5 -1 +1 +1 0

Positioning 5.0% 0 0 +3 0 0 0 +1 -1 0 0 -

Technicals 10.0% +2 +1 -2 +2 -5 -4 +1 0 -1 -3 +1

Liquidity 0.0% +4 +2 +3 +2 -1 -3 -3 0 -3 -4 -4

Ec. Surprise 10.0% -2 +1 0 0 -2 +1 0 -1 +3 0 -

Event risk 0.0% 0 0 0 0 0 0 0 0 0 0 0

Risk appetite 5.0% 0 0 -1 0 0 0 0 0 0 0 0

Total weighted score +0.3 +0.2 -0.1 +0.1 -0.2 +0.1 -0.0 -0.0 +0.3 +0.1 +0.2

G10 FX Scorecard - Contributions to total score

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Currency Strategy

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Currency Strategy

SEB FX EM Scorecard, Medium TermWeights RUB CNY

Fundamentals 20.0% +1 +1

Carry 5.0% +5 -3

Monetary policy 20.0% 0 +1

Flows 10.0% +1 +2

Valuation 15.0% 0 0

Positioning 5.0% -1 -1

Technicals 10.0% -5 +3

Liquidity 0.0% -3 0

Ec. Surprise 10.0% 0 +1

Event risk 0.0% 0 0

Global cycle 5.0% +1 +1

Total weighted score +0.0 +0.3

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Currency Strategy

Big Picture: Growth and monetary policy drive FX outlook

In our last Currency Strategy report we outlined severalthemes we thought valid for Q4 2013 and early 2014. Webelieved Fed tapering was imminent and that it would –

together with the increasingly positive US growth outlook– promote a return to a strong USD, particularly vs.commodity currencies. In our SEB FX Scorecard werecommended long USD, NOK, EUR, SEK and GBP vs.short JPY, AUD, NZD, CAD and CHF. Although wrongconcerning Scandinavian currencies, especially vs. NZD,our basket has appreciated by almost 2% since itsinception. Further, USD/JPY has also gained considerableground (one of our other recommendations), whilecommodity currencies have underperformed (NZDexempted). We still expect these developments tocontinue at the start of this year, as we explain below.

A BROKEN TREND AT LASTLast year, the FX market finally broke its post-2009 trendin which currencies of small and economically soundperipheral countries have continued to outperform. Thefactors behind this previous development were probablymany but a few are listed below:

1) Peripheral currencies became significantly overvaluedwith the Aussie as a prime example, 2) In responseAustralia cut interest rates, while Sweden also lowered itsinflation outlook substantially as a result of the krona

trading at a 20 year trade weighted high; 3) Austerityeffects of European fiscal policies led to a rapidlyimproving European current account, while foreignportfolio flows entered the Euro-zone (a process whichhad already begun in autumn 2012) as the OMT programlowered the region’s risk premia; and 4) Growth finallyrebounded in the UK and US; later the Fed also tooksteps to signal an imminent reduction in QE3 purchases.Given the improving G4 growth perspective and thechanged stance of peripheral central banks, the FXmarket increasingly favoured large and liquid currencies.As stated we expect this theme to continue with lowvolatility and smaller FX moves. The further theeconomic recovery continues the more uneven(divergent) will be the respective central bank policy

outlook. In time, we expect this to boost FXvolatilities and increase the size of FX moves, thoughwe regard these developments as likely to occur in 2015

when some central banks stand ready to hike the policyrate. The most important FX drivers this year areeconomic growth (momentum) and expectationsregarding central bank policy. These factors alsoremain the highest weighted in our SEB FX Scorecardranking where Monetary policy and Fundamentals have acombined weight of 45%.

GLOBAL GROWTH RECOVERY – BUT DIVERGENT

CENTRAL BANK DEVELOPMENTS

The current economic recovery is being led by the US.Our 2014 (3.3%) and 2015 (3.7%) GDP growth forecastsremain above consensus. Following an increase of 4.1%AR in the third quarter, the economy looks almost certainto expand by 3% AR in Q4. Household debt has fallenfrom 125% of disposable income in 2007 to 100% today,and hence the household sector is well-positioned todrive the economy forward. We also expect a substantialincrease in business investment in 2014.

However, Fed monetary policy continues to be eased

with QE3 set to continue for most of this year; SEBexpects a fairly linear reduction (of approximately USD10bn at each Fed meeting) in its QE3 programme. At its

latest meeting in December 2013, the Fed pledged tokeep rates unchanged long after its 6.5% unemploymentrate threshold is hit. As a result, we do not expect thisthreshold to change at forthcoming meetings. The rate atwhich QE3 is reduced will depend on GDP and labourmarket data. The Fed expects 3% growth in 2014 andunemployment decreasing to 6.5% by year-end. Our ownforecasts could imply a faster tapering schedule based onstrong labour market developments. For the USD, weregard the monetary policy outlook as a neutralfactor with an upside risk if our optimistic economicforecasts prove correct.

Turning to the Euro-zone, although the outlook hasclearly improved obviously economic developments lag

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Currency Strategy

and are much weaker: they include further deleveragingby the public and private sectors (the banking sectorcontinues to shrink its balance sheet ahead of importantstress tests later this year) together with highunemployment, low inflation and impaired bank lending.SEB forecasts Euro-zone GDP growth of 0.8% and 1.6%

in 2014 and 2015, respectively. We expect inflation toremain well short of (SEB forecasts EMU HICP to staybelow 1.0% until the end of 2015) the ECB target(approximately 1.8%) and believe the ECB will probablylower its own HICP estimates at its March meeting,paving the way for a further policy response from theECB: later this spring we expect it to announce GDP-weighted (non-sterilised) bond purchases ofapproximately EUR 40-50bn each month.

The question remains – how will these affect theeuro? The answer is not straightforward as the commoncurrency has been driven higher by increasingly positiveportfolio flows into Euro-zone bond and equity markets.Should the market continue to build expectationsthat the ECB will adopt a QE-program consistentwith our own forecast, flows leading up to such adecision may well be euro-positive and indicated by acontinued decline in Euro-zone risk premiums. Further,while balance sheet expansion by other central banksmay have contributed to currency weakness, it is notobvious that QE policies lead directly to weaker exchangerates. One example is the Bank of England where Sterlingbottomed out before the central bank launched QE inearly 2009. Also, the BOJ ran QE policies for a very longtime to no effect, except a stronger currency, until veryaggressive policies were adopted in 2012, which includeda higher inflation target. These were preceded by G7coordinated JPY interventions by global central banks. Inpractice, the connection between expansion of themonetary base and currency weakness is therefore notstraightforward. Nor is the relationship betweenmonetary growth and inflation. Additionally, we questionwhether QE policies in Europe will be effective in endingcurrent deleveraging, including decreasing bank lending

and low M3 growth. We treat adoption of QE by theECB as requiring the market to “buy the rumour and

sell the fact”, i.e. we think it likely speculationsurrounding the program will boost flows intoEurope ahead of its launch. However, its actualadoption will represent a sign of weakness, causingthe euro to be sold off after the ECB launches QE.

Conclusion EUR/USD: Weak growth and disinflation

tendencies in Europe at the same time as the US growthsituation is becoming clearer and improving more rapidlyshould support our long-held view that EUR/USD willweaken in coming quarters. The market has beensurprised by the strong positive euro flows; we are unsurewhen they may ease. However, in time QE policies willhighlight the EMU’s large structural problems concerninghigh unemployment, disinflation tendencies and weakgrowth. While Fed monetary policy remains very loose, itwill eventually tighten; indeed the bank may reduce QE3

faster than anticipated judging by our economic/labourmarket projections. We therefore recommend sellingEUR/USD on rallies. However, depreciation of theeuro will take time; near-term we expect it to remainone of the strongest currencies.

In Japan, the effect of the upcoming VAT hike will beimportant to follow. Traditionally this type of policy hashad deflationary effects in Japan. However, as thecountry desperately needs to strengthen its publicfinances it must adopt such measures. “Abenomics” hasbeen partly successful and the weaker JPY hascontributed to higher inflation – wages however have to

rise further for a sustained inflation rate towards the 2%CPI target. We expect the BOJ to seek to counteract thenegative economic effects of the VAT hike by alsoexpanding monetary policy. From a 1-3 monthperspective, USD/JPY will continue to range tradebetween 101-106 as the speculative market is veryshort JPY. Also, so far longer-term portfolio flowshave not turned aggressively negative for the JPY.The move towards the 2% inflation target but withthe objective of keeping nominal bond yields below1% will surely cause fixed income-related capitaloutflows to depreciate the JPY by a further 10% over

the next 1-2 years.

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Currency Strategy

Sterling has clearly benefited from the UK’s strongergrowth outlook. Also, unemployment has fallen rapidlytowards the adopted target (7.0%) which is aprecondition for higher policy rates. However, we do notexpect the BOE to hike rates anytime soon: inflation is onits way down and productivity should improve with

increasing GDP. Therefore, unemployment will not fall asquickly as some fear. The strongest reason for the BOEnot initiating a rate hike cycle this year concerns thecomposition of UK growth: so far the recovery hasbeen driven by domestic demand supported byrising asset prices. Meanwhile, growth in real wages ispoor. The UK economy needs rebalancing and for that tooccur a relatively weak pound is part of the policy mix.Premature rate hikes will surely work the other wayaround. A recovery in the Euro-zone may boost UKexports. However, this has not yet occurred. Also, afterseveral years of stagnant growth, the economy is

operating well below its neutral level. As a result, over themedium-term we look to sell GBP as the BOE trims themarket’s over-optimistic outlook for higher policy rates.The February Inflation Report will be the first importantevent and make very interesting reading. As we aremore optimistic on SEK (once more) we seeopportunities to sell GBP/SEK between 10.60/80targeting the low 10s again.

CAUTIOUSLY STRONGER SEK, VERY UNCERTAIN NOK

OUTLOOK The Swedish krona, together with the USD, is ranked atthe top of our scorecard. The currency is expected to

appreciate as growth improves and the Riksbank staysfirmly on hold. We expect SEK to trade more closelyaligned with the business cycle. Previous strong safe-haven related inflows have eased but not stopped.However, in net terms they are less important now vs.2011-2012, which was characterized by strong inflows. Asa result, we regard the breakdown in correlationsbetween business barometers and trade-weighted kronaperformance as temporary. Instead, the improvingoutlook shown by Sweden’s leading indicators suggests astronger SEK outlook. Since the Riksbank rate cut, thetrade weighted krona has strengthened by almost 4%.

Near-term we are slightly cautious regarding the riskof: 1) continued low inflation surprises; and 2) the riskthat barometers deteriorate slightly before continuinghigher (divergence currently between PMI manufacturingand NIER confidence). Also, “hard” economic data suchas industrial production and exports have continued todisappoint. We target 8.50 in EUR/SEK by end-2014and have recommended selling the pair at 9.00. Inthe long-term, Swedish monetary policy must deviatefrom a continued dovish ECB policy, which will certainlyboost the currency. However, we do not expect any G10central bank rate hikes in 2014, as the effects on the

currency of deviating too much from still dovish G4central bank policy will be too positive.

As regards the Norwegian krona the outlook is veryuncertain. Economic growth has weakened led bydisappointingly slow private consumption, while house

prices are decreasing. Given the country’s wealth, highlyadverse effects from substantially lower house prices arehard to identify with funds clearly available to prevent theemergence of systemic risks. Oil-related investments arealso uncertain as commodity prices have moved lower. Inprevious years, the petroleum sector has grown stronglyand hence these are treated as a risk. However, marketprices currently discount a fairly high 20-30% probabilitythat Norges Bank will lower rates in March. Still, we donot believe a rate cut is l ikely.

Since 2006 foreign banks have accumulated significantNOK assets, as shown in the chart below. As the outlookis most uncertain we cannot rule out continued selling ofthe Norwegian krona. We rank the currency just belowthe G10 average in the SEB FX Scorecard and remainbearish on NOK/SEK targeting 1.00 by end-2014.

Finally, commodity currencies have weakened althoughtheir development has been most uneven. We are bullishUSD/CAD and have recommended longs as a top tradefor 2014 (we target 1.12/1.16). CAD is judged weak on

most of our ranking factors, though over time the outlookshould improve as the overvalued currency weakens andUS growth accelerates. AUD has depreciated more than

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Currency Strategy

any other G10 currency except the JPY in the past 12months, due to poor terms of trade developments and anaggressive RBA verbally intervening to lower the value ofAUD. With the currency now close to our long-term fairvalue (0.87), we expect only moderate depreciation vs.the USD going forward. NZD has at last been much

stronger than we expected, since growth has exceededmost forecasts as a result of improving terms of tradeand construction related rebuilding following the 2011earthquake. RBNZ has a tightening bias but cannotdeliver what the market has already discounted(three rate hikes) because the currency willstrengthen too much. Going forward, for our forecast(weaker NZD) to be proved correct, we need to see theRBNZ ease its hiking stance should its macro-prudentialtool prove effective in curbing domestic credit growthand house price developments. In time, New Zealandneeds a weaker exchange rate; its currency is 20-25%

overvalued according to our internal valutation models.SEB FX SCORECARD PERFORMANCE SINCE

SEPTEMBER 2013.

Despite a difficult period following its introduction in Maythis year, our FX Scorecard portfolio has generated apositive return since our last Currency Strategy publication in September. The SEB FX Scorecard totalreturn index, which tracks suggested currency baskets,has generated a 4.8% profit since Sep 10.

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

US D E UR J PY GB P C AD A UD N ZD CHF S EK NOK

Contribution to portfolio performance

May 2013 to Jan 2014

The largest positive contribution to total performancesince the September publication was attributable to shortexposures in JPY, AUD and CAD. Conversely, the mostsignificant losses were due to a short exposure in NZD,which has not performed despite its overvaluation, andthe USD, which has failed to strengthen as we expected.

After performing strongly since September 2013, the FXScorecard index is now almost unchanged since itsintroduction in May 2013. For the full period its positivereturn reflects our view on the JPY and CAD, and oursuccess in capturing sharp swings in GBP. IN contrast thenegative return is mostly attributable to a long AUDexposure in May when the currency fell sharply, due to asurprisingly soft central bank and uncertainty regardingChinese growth prospects. Moreover our core positiveview on the NOK in 2013 was wrong as Norwegiangrowth prospects have disappointed, and becauseNorges Bank at last achieved its objective to weaken the

currency. Finally, our core positive view on the USD hasfailed to materialize in the way we expected.

NEXT FX MARKET REGIME? – MONETARY POLICY

EXPECTATIONS REGIME TO PROMOTE A CARRY

MARKET IN 2015?

In mid-2012 several developments occurredsimultaneously, which proved very important for the FXmarket. In July 2012 the ECB launched its OMTprogramme to convince financial markets that the ECBwould save the euro. Moreover, the Fed initiated the firststage of QE3, which further increased global liquidity. Atthe same time, there were growing signs that the BOJ

would adopt a more aggressive monetary policy as acornerstone of Abenomics to break once and for all thecountry’s devastating price-deflation trend. Severalsmaller currencies had also become overvalued, due toincreasing risk appetite, strong economic fundamentalsand a less dovish monetary policy. At this junctureseveral of these currencies’ smaller central banks beganto respond through verbal or de facto interventions andby lowering rates to prevent continuing currencyappreciation, which undermined their competitiveness.Since then, monetary policy expectations became the keyFX market driver, with currencies backed by more neutral

or even hawkish central banks receiving support whilethose with dovish central banks depreciated.

This is where we stand today. Monetary policy appears toremain the key driver for FX markets and exchange ratesfluctuate with market expectations on monetary policy.As a result, currencies are supported when theseexpectations become more hawkish but weaken whenthey become more dovish, a situation which also involvesconcentrating more on growth and inflation. Given itsmajor focus on monetary policy expectations andbecause the general global trend still indicates eveneasier near-term monetary policy from major central

banks including the BOJ and ECB, the current regimelooks likely to persist for some time yet.

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Currency Strategy

Of course, it is difficult to state exactly when the FXmarket will become subject to another regime or whatthe key currency driver might be under it. However, thepresent situation is likely to persist until at least one or

several major central banks start to signal a tightermonetary policy. Given current very low general inflation,due to pressure from global deleveraging, this appearsunlikely to occur before 2015. Provided major centralbanks continue to ease monetary policy, they willprobably also stop their smaller peers from taking stepsto tighten theirs, as this would mostly subject their owncurrencies to further pressure to appreciate. Therefore,the trigger for the next currency regime will probablyconcern Fed monetary policy and involve a completecessation of asset purchases and signalling of higherrates, a situation which would also make it possible for

smaller central banks to begin tightening monetary policyas well.

So what will the next regime be like?Naturally, answering this question requires considerablespeculation. However, as we expect the current regime tocontinue until the Fed, or another large central bank,announces a more hawkish monetary policy, this will alsocause rate differentials between currencies to widen.Moreover, several central banks (such as the BOJ andECB) will probably remain on hold for longer, due to theparticular conditions prevailing in their respective

regions.

Consequently, increasing rate differentials will onceagain (eventually) improve the return on carry exposures just as they did 10 years ago. However, to produce a newcarry regime, FX volatilities must be low enough to avoideliminating the return from rate differentials. AlthoughFX volatilities have fallen substantially in recent years,

seemingly to around pre-financial crisis levels small ratedifferentials still makes the carry strategy unattractive.The chart below shows the carry between the most liquidcurrencies and the JPY adjusted for FX volatility. Currentlynone of the currencies can generate a risk-adjustedreturn above 0.25% which roughly is the lower bound tomake this sort of strategy profitable.

Therefore, although FX volatilities have declined sharplysince the financial crisis and currently are close to pre-crisis levels it is not enough to trigger the emergence of a

new carry regime due to current rate differentials. On thisbasis therefore, it suggests that a new carry regime willbe established the day central banks start consideringmonetary policy tightening, which probably will be atheme for 2015 at the earliest. Until then the currentregime will likely be in place.

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Currency Strategy

US dollarAccording to the BOE trade weighted USD index, theGreenback appreciated by almost 3% last year.Nevertheless, it fell short of the euro and sterling, whichwere even stronger. With the Fed now slowly reducingQE, while the ECB in contrast may need to introduceadditional measures, divergent monetary policy shouldsupport our more positive view on the USD this year.

ECONOMIC FUNDAMENTALS Given that last year’s fiscalpolicy contraction reduced economic growth by almost2% the underlying growth rate was surprisingly strongwith the economy expanding by around 1.7% in 2013.This year the negative impact of fiscal policy will besubstantially smaller. Moreover households appear tohave completed deleveraging, while rising equity andhouse prices have boosted household wealth. As morepeople are hired the contribution to growth fromhousehold spending is likely to accelerate. In additioncapital spending remains at historically low levels.However, as political uncertainty is substantially lessfollowing the budget deal in December 2013 businessesmay consider it more attractive to expand theirinvestments in response to stronger demand this year.Growth of almost 3.5% in 2014 is likely to support the

USD this year.+3

MONETARY POLICY In December the Fed took the firststep to wind down its bond purchases of USD 85bn,which have been taking place since the end of 2012. Itwill continue to lower them steadily this year based on

the outlook for the economy in general and the labourmarket in particular. We expect the Fed to reduce bondpurchases by USD 10bn at every meeting going forwardprovided that the economy creates sufficient jobs tofurther reduce unemployment. As a result, they willprobably end sometime late this year. As long as the Fedcontinues to create money to purchase assets it must beconsidered to be easing monetary policy, which shouldprevent currency strengthening. Therefore, from acurrency perspective monetary policy is unlikely toprovide any support and could at best be regarded as

neutral for the dollar over the next 3-6 months. 0

FLOWSPrior to the financial crisis in 2008 stronger USgrowth and in particular growth dominated by household

spending generated a growing current account deficit.Weak economic activity during the recession andincreased savings by households and businessesproduced a cyclical improvement in the deficit andreduced US dependence on foreign savings. Althoughstronger US growth may cause the deficit to widen againgoing forward, increasing domestic oil production willhave a positive impact on external trade which shouldpartly offset these effects. Further, rising US yields andstronger US growth should suffice to attract financialinflows from abroad going forward. Therefore, although

the flow situation probably is negative overall for the USDit gets closer to neutral. -1

EUR sp eculative positions

04 05 06 07

C o n t r a c t s ( t h o u s a n d s )

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0

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1.350

Speculative positions

EUR/USD

The lack of significant upside progress inEUR/USD makes the current substantial netlong speculative position a burden. Shouldthe sub-1.29-area be revisited, speculativelongs will have to be reduced.

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Currency Strategy

US dollarVALUATION Our internal long-term fair value model,SEBEER, indicates the USD trade weighted index probablyhas been undervalued since 2003 and still is. It appearsthe general dollar depreciation coincided with the

introduction of the euro in 2002. The euro then earnedthe reputations as an alternative global reserve currency,triggering structural rebalancing flows out of the USD.However uncertainties related to the euro and the yen,and superior US growth outlook should eventually triggera recovery for the USD. Our internal valuation model, aswell as the real effective exchange rate, indicate the USD

remains undervalued. 0

POSITIONING The net positioning among speculativeaccounts is net long the USD, indicating a belief it willappreciate. In a two-year perspective, the net longposition is longer than average but not at levels

associated with normalization. Following Fed’s decisionnot to taper QE in September, a net long USD positioningwas neutralized. In November when the budget ordeal inthe US was solved and when data started to indicate ahigher probability of December tapering, a net long USDposition has been built once again. End of December andearly January this has continued but the rate of change

has been low, rendering a neutral score. 0

TECHNICALS There is possibly a bullish medium-termwave structure unfolding, but this scenario needsextension beyond 82.17-82.67 for confirmation. Anextension above 81.50 would boost a positive grade whilea (less likely) move below 79.68 would indicate that a

penned advance is incorrect or at least premature. +2

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE With itssuperior liquidity the USD traditionally has beennegatively correlated with risk appetite. However since2012 these relationships between currencies and riskappetite have disappeared and that goes for the USD aswell. Nevertheless should some unexpected event ariseand hurt risk appetite we would prefer to be long the USDirrespective of its weak correlation with risk appetite. Thisfar divergent monetary policy has failed to render theexpected support for the USD as US interest rates havestayed very close to the German counterparts. However,going forward widening rate differentials between US andthe euro area should support the USD, but it probablytakes further steps by the Fed for that to occur.


04 05 06 07


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EUR/USD


Technical view: USD INDEX

Weekly Q=USD 2013-02-01 - 2014-02-21 (STO)

82,17 100,0%

83,71161,8%

Price

.12

79,00

80,00

81,00

82,00

83,00

84,00

80,95

81,43

f m a m j j a s o n d j fQ1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 14

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Currency Strategy

The EuroIn 2013, the strength of the euro surprised, movingupward as crisis fears eased, budget deficits decreased,external surpluses rose and institutional reformsprogressed. Measures taken by the ECB did little to harmthe currency. With the euro area expected to continue to

emerge from the crisis in coming months, markets mayretain a positive view on the euro. However, most positivenews appears to be already discounted. Impatienceregarding the slow progress being made in leaving thecrisis behind could resurface again. Further, several of theECB’s quantitative easing measures and the judgement ofthe German High Court on the ECB’s OMT program maypotentially weigh on the euro.

ECONOMIC FUNDAMENTALS Survey based leadingeconomic indicators suggest that the economy continuedto grow in Q4 2013. Looking ahead, the recovery is likelyto remain lacklustre in 2014 with a risk of deflation. Morepositively, the Euro-zone is emerging from its crisis. Still,growth will remain too weak either to make anysignificant inroads into unemployment or restore publicfinances to a more sustainable condition. Furthermore,decisions taken on banking union rules indicate thatfurther necessary economic adjustments must take placethrough austerity and price deflation in peripheral states.Polls on the possible outcome of EU parliamentaryelections in May suggest anti-European parties may gainat least one third of the votes. Such signals may alsocause politicians to delay implementation of furtherstructural reforms. Nevertheless, with growth an

important component of any consideration offundamentals, the euro has a small positive weight, due

to the weak but improving GDP outlook. +1

MONETARY POLICY The ECB kept its policy rates atrecord lows in January and intends to leave them therefor a long time, or even reduce them further. We expectthe central bank to introduce quantitative easingmeasures in March to limit downside risks to inflation andto lend more support to the euro area recovery. A massiveinjection of monetary liquidity could exert further down-side pressure on the currency. The upcoming ruling of theGerman High Court on the ECB’s OMT program could

limit the bank’s ability to honour its promise to dowhatever it takes to save the euro. -1

FLOWS In the 12-months to end-October 2013, thecumulated seasonally adjusted current account posted asurplus of 2.2% of GDP, well above 1.2% in December2012. This upward trend is likely to continue in comingmonths, still strongly supporting the currency. Combineddirect and portfolio flows reported cumulated net inflowsof EUR 5bn in the 12-months to October 2013. Overall theflow picture remains supportive for the euro. +2


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Currency Strategy

The EuroVALUATION Very few today believe in a break-up of the

currency and the break-up risk premium attached to theeuro has been significantly reduced. With increasedstability the low valuation of financial assets and high

yields have attracted foreign inflows. Hence, although theUSD has strengthened in recent months the euro hasoutperformed it. From previously being consideredslightly undervalued the euro today instead appearssomewhat expensive compared to its long-term fairvalue. Obviously competitiveness is very diverse amongeuro zone members. German exporters could most likelytolerate EUR/USD at 1.40 or higher whilst the GIIPS-countries and France would favour a weaker euro in orderto restore competitiveness. A correction towards its long-term fair value is only likely to happen on the back ofgeneral dollar strength. -1

POSITIONING In November and December speculatorsbegan building a net long position in EUR. The size is stillquite modest but given that a net short position has beenthe norm during the past three years (especially 2011 and2012) this is a sign of growing EUR confidence. In themost recent weekly report on positioning the net longposition was reduced, providing a negative slope scorebut not enough to generate a negative overall positioning

score. 0

TECHNICALS The yearly average is still rising and theEUR index remains above it. But the advance throughout2013 was remarkably slow and lacklustre, forming a

trend-ending “Wedge”. If breaking dynamic support at110/109 a setback all the way down to the base of the“Wedge” at 105.15 could be pencilled in. +1

LIQUIDITY, EVENT RISKS, GLOBAL CYCLE. In comingmonths we see mainly two event risks. Both theupcoming ruling of the German High Court on the ECB’sOMT program as well as the election to the EU parliamentin May have the potential to weigh on the euro. Asregards liquidity, the rising optimism about the outlookfor the economy supports capital inflows into euro areafinancial instruments, in particular equities. Furthermore,the ongoing deleveraging in the European financialindustry leaves overall financing needs contained incoming months.


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Technical view: ECB EUR index Weekly Q=EUR 2012-07-06 - 2014-03-28 (STO)

Price

.12

98,00

100,00

102,00

104,00

106,00

108,00

110,00110,84

108,98

Q3 Q4 Q1 Q2 Q3 Q4 Q12012 2013 2014

13



Currency Strategy

Japanese YenThe Japanese currency was the weakest of the G10-

currencies in Q4 2013. This year has begun with moremoderate risk appetite. Indeed, the weak US non-farmpayroll report on Jan 10 initiated some profit-taking on acrowded long USD/JPY position. The long-term outlook –a weaker JPY – is intact. Following a brief period of range-

trading in USD/JPY 101-106 as some excessively shortspeculative positions are liquidated, we expectdepreciation to resume targeting 110 by year-end.

ECONOMIC FUNDAMENTALS The economy continues to

improve as “Abenomics” generates short-term positiveoutcomes: GDP Q3 2013 increased 2.4% q/q AR afterrising 2.6% y/y in Q2. SEB expects GDP growth of 1.7% in2014 and 1.3% in 2015, respectively. Meanwhile, CPI(excluding fresh food) rose by 1.2% y/y in Dec, its fastestrate since 2008. Therefore, PM Abe looks set to deliver onhis two first “arrows” (monetary and fiscal expansion)

included in the economic plan to achieve the newlyadopted 2% inflation target. Much remains to beimplemented regarding the third leg, economicrestructuring. In April VAT will rise from 5% to 8%, theeconomic outcome of which is uncertain, especially forinflation as previous VAT hikes have pushed Japan backinto deflation. Strengthening public finances must be apriority going forward. We expect the VAT hike to be JPYnegative as the BOJ will seek to counteract the negativeeconomic effects by additional monetary expansion. +1

MONETARY POLICY BoJ governor Kuroda has

implemented a “triple 2” monetary policy by targeting 2%inflation within 2 years and doubling (2x) the monetarybase to exit deflation, which has crippled the economy foralmost 15 years. Growth in monetary base is nearly 46%y/y (currently JPY 200trn) working its way towards theBOJ adopted target of 270 trn (roughly 50%/GDP). Goingforward, this target is likely to be raised as the negativeeffects of fiscal austerity impact. The BoJ will probably

make QE open-ended and remove its 2-year target. -2

FLOWS Underlying current account developments areclearly negative for the JPY (growing trade deficit).Although unlikely to produce an overall deficit soon (as

net investment income will continue to generatesubstantial net inflows) the risk of moving towards adependence on external capital will increase as domesticinvestors send capital abroad. In early 2013, the outflowwas concentrated on speculative flows (otherinvestments). Domestic investors have not sent moneyabroad through bond or equity purchases. They havedelayed as a result of recent turmoil in emerging marketbond markets and selling in US Treasuries fearing tighterUS monetary policy. Despite likely intermittent JPYweakness due to smaller speculative flows, non-speculative bond and equity flows must become outflows

if we are to see sustained weakness in the JPY. Eventuallythis development will happen given the adopted 2%inflation target in combination with a need to keep

nominal bond yields at record low levels. 0


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JP CPI ex f resh f oods YoY %

-3

-2

-1

0

1

2

3

4

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0 9

1 0

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1 3

14



Currency Strategy

Japanese yenVALUATION The rapid depreciation since Q4 2012 hasmoved JPY valuation into neutral territory. Our ownSEBEER model actually indicates the JPY is somewhatundervalued in trade weighted terms. Similarly the

deviation from long-term nominal trend now signals asubstantial undervaluation whilst the real effectiveexchange rate trend is close to current spot level. Ourbest estimate for JPY valuation is that the currency isaround fair value but is that really fair considering current

BOJ monetary policy? +1

POSITIONING Speculative accounts are massively JPY

net short. In the final week of 2013 positioning was mostnet short since the end of the carry trade era in 2007. Inthe latest weekly report the net short begun to normalizeand further normalization is expected over the comingweeks, which is reflected in the positive JPY score. +3

TECHNICALS The yen remains on a negative track and it

is trading well below the negatively sloped yearly average.But from an Elliott wave perspective the “wave-5 low”may be in place, why the negative score for the currencyis taken down to a modest -2. Should the correctionhigher kick in now, a correctional target would be fair atthe yearly average, now at 145, or even at the high in

“wave-4” at 150. -2

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE

The speculative part of the FX market is heavily short theJapanese JPY. This is a prime risk as long USD/JPY hasdeveloped into a large (but working) consensus bet. Thelong USD/JPY bet has been initiated for two goodreasons: 1) Fed will continue to tighten monetary policyleading (taper Qe3 to start with) to increasing interestrate differentials between USA and Japan. This will attractflows from Japan to the US. 2) We expect BOJ to expandmomentary policy further as the upcoming increase inVAT in April will work to cool the economy.Disappointments on either of these factors will surelypromote some profit taking on long USD/JPY. We regardlevels towards 100-102 as attractive for reinstating suchposition.


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Technical view: BOE JPY index

Weekly QJPYBOEEER= 2011-09-30 - 2014-04-11 (STO)

1

2

53

4

Price

.12

130,00

140,00

150,00

160,00

170,00

180,00

190,00

134,80

144,48

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22011 2012 2013 2014

15



Currency Strategy

British pound sterlingDespite a very poor start last year the GBP was one of thestrongest currencies in 2013. It was supported by astronger and more persistent growth recovery, which alsofed premature expectations that BOE monetary policy willbe tightened this year. However, current growth canhardly be maintained. Weaker growth should producemore dovish expectations on the BOE, weighing on thecurrency.

ECONOMIC FUNDAMENTALS The UK’s continuedeconomic recovery last year took us by surprise. While itis hardly unexpected that the economy should bounceafter several years of sub-trend growth, it should haveslowed by now. However, the forces currently supportingit are the same as those that caused its problems in2007/08. Low interest rates combined with governmentprograms to ease household credit conditions have kick-started the housing market ending years of deleveraging.

Consequently, despite weak earnings growth householdconsumption is supporting domestic demand, which forinstance was illustrated by record strong growth in retailsales in December (6.1% y/y). However, even before thefinancial crisis in 2008 the governor of the BOEemphasized the importance of a structural shift in growthdrivers away from domestic consumption towardsexports and investments. So far, this has not occurred.Near-term there is a risk that growth will underpin furtherGBP-strength, but there will certainly be periods of

weakness as no recovery is linear. +3

MONETARY POLICY In August the BOE (under its new

governor) introduced forward guidance to increase thecredibility and predictability of monetary policy andprevent bond yields from rising. By linking monetarypolicy with the unemployment rate as a proxy for theamount of spare capacity in the economy, the BOE hopedto convince markets that tightening monetary policy is along way off. However, investors remain unconvinced.Expectations on policy tightening have been broughtforward, due to stronger growth and lowerunemployment. Currently market pricing reflects a fullrate hike in Q4 this year, which we and the BOE believe istoo soon. Stronger growth is likely to improve

productivity and slow the improvement inunemployment. Eventually a re-pricing of currentmonetary policy expectations will negatively impact the

pound. -2

FLOWS The current account deficit has failed to improvedespite several years of currency depreciation anddeleveraging by UK households. Perhaps this is partly dueto weak demand in some of the UK’s core Europeanexport markets, although we think it reflects structuralproblems with the British economy, which musteventually be resolved. For now outflows related to tradeand net investment income are being offset by financial

inflows. However, weaker growth may once againundermine the attractiveness of UK financial assets, inwhich case, imbalances may weaken the currency. -1


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Currency Strategy

British Pound SterlingVALUATION After depreciating substantially in 2007/08the GBP reached undervalued levels. Since then acombination of falling long-term fair value and, to some

extent, a rebound in the nominal GBP-index, have movedthe currency towards its estimated long-term fair value.We do not expect valuation in itself to trigger a move inthe GBP from current levels. 0

POSITIONING Speculators are the most bullish

positioned since early 2013. However this is not enoughfor a negative mean reversion score since there werethree occasions in 2012 when speculators where netlonger GBP. In the latest COT report on positioning,speculators had begun to scale down their net longposition which neutralized an otherwise positive trend

score. 0

TECHNICALS: The move higher shows that demandpersisted into yearend and beyond. This renders apositive grade for the pound but the move shows atendency to create a “Wedge” which indicates loss ofmomentum. The distance to the yearly average alsoindicates a stretch which bodes for at least some kind ofcorrection lower. Should this correction unfold asthought, and break below support in the high-83s,extension should be pencilled in towards the next support

and the current level of the yearly average near 82. +2

EVENT RISK, LIQUIDITY AND GLOBAL CYCLE

Traditionally changes in the sterling exchange rate havebeen almost uncorrelated with global risk sentiment andthat still seems to be the case. Large financial marketsand the tradition as a reserve currency make the GBPamong the most liquid currencies in the world. As such ittends to be almost unaffected when financial marketsfocus on liquidity. In 2013 the UK economy recoveredmarkedly after years with weak growth. Despite higherforecasts the economy has continued to surprise on thepositive side supporting the currency. Moreover a sharperthan expected drop in unemployment to 7.4% inNovember has had implications for BOE expectations.According to current pricing the BOE is currently

expected to lift the rate already in 2014, which we think istoo optimistic. Hence currently the biggest risk related tothe GBP is a growth related disappointment feeding intomore dovish expectations on monetary policy, which forsure will weigh on the GBP.


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Technical view: BOE GBP index Weekly Q=GBP 2012-04-27 - 2014-03-21 ( STO)

Price

.12

78,00

79,00

80,00

81,00

82,00

83,00

84,00

85,00

81,69

Q3 Q4 Q1 Q2 Q3 Q4 Q12012 2013 2014

17



Currency Strategy

Canadian DollarThe Canadian dollar is one of the lowest scored in thisreport. Negative factors include technicals, economicsurprises and flows. Previously positive, monetary policyis now neutral as the BOC has abandoned its previouslyhawkish bias – housing price developments/domestic

credit growth have slowed while the focus has nowswitched to low inflation/growth and still weak Canadianexports.

ECONOMIC FUNDAMENTALS Economic growthrebounded to 2.7% AR in Q3 from 1.7% in Q2. Domestichousehold consumption remained the key contributorwhile net trade still contributed negatively. So far, thetransition towards export generated economic growth,which the BOC wants and expects, has not materialized.Weak external competitiveness due to an overvaluedCAD has improved as dovish monetary policy

expectations have contributed to significant CADdepreciation. We recommend closely monitoringbusiness investment contributions to US GDP (weak sofar). A BOC study found this particular factor has a majorimpact on the Canadian GDP outlook. SEB expectsstronger US investments, which in time should also

improve prospects for Canada. +1

MONETARY POLICY The BOC has kept its policy rate on

hold at 1% since September 2010. In its October policystatement it finally dropped its hawkish forward guidancein favour of a neutral stance. Since October inflation hascontinued to surprise on the downside – Nov (0.7%) and

Dec (0.9%). With inflation persistently below its 2%target, the BOC now attaches increasing significance todownside risks to inflation. As expected, its newgovernor, Stephen Poloz, has proved more export-oriented than his predecessor Mark Carney who focusedmore on household imbalances. In a speech, Poloz hasindicated that the BOC stands ready to cut the rate if dataremain weak. However, current and on-going CADdepreciation will probably reassure the BOC sufficiently

to enable it to leave its policy rate unchanged for now.Considering that current pricing indicates a smallprobability for a rate cut which we don’t think will

materialize we view monetary policy as a small positivefor the CAD. +1

FLOWS Weak competitiveness continues to produce

trade deficits where the November deficit turned out ninetimes as large as expected (at -0.9bn). While they havebeen partly offset by foreign portfolio bond inflows, thesehave decreased as the Euro-zone recession comes to anend. Foreign portfolio flows in November increased to8.7bn from 4.4bn in October though the long-term trendis negative. On the positive side, the inflows has notturned as some were worried that they would do in 2013and especially after June data showed a record large

outflow in bonds. The current account deficit of around3% of GDP remains CAD negative. -1


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Currency Strategy

Canadian dollarVALUATION In trade weighted terms the Canadian dollar

belongs among those currencies being consideredovervalued from a long-term perspective. Although theloonie has weakened lately our internal long-term fair

value model indicates the CAD remains around 5%overvalued against its trade weighted index, and the BISreal effective exchange rate gives a similar picture.Hence, valuation is unlikely to stop the currency fromfurther weakness. With signs that previously supportivecapital inflows have evaporated it may continue itscorrection towards a more reasonable valuation. Howeverconsidering the long-term trend in a nominal tradeweighted index recent currency weakness has reachedextremes and further depreciation may be a lot slower. 0

POSITIONING A large net long CAD position was

gradually turned into a net short position during theperiod from September 2012 to April 2013. During May-October, this process normalized. In October BOCdropped its hawkish forward guidance and since thenspeculators have been adding to their net short positionagain. During the recent weeks, the net short position hasstabilized. A stable position renders no negative scoreand as even if the net short position is substantial, it isnot any more pronounced than just before Bernankebegan the tapering talks in May and thus normalization is

not expected yet. 0

TECHNICALS The recent paced drop shows accelerationas the index was allowed to cut below earlier support nearthe 106-level. The 2010-2013 “Round-top” formationactually holds an ambitious theoretical 93.40 objective.But in the short-term, conditions have become a littleoverstretched and a small recoil to recheck mentionedsupport (now acting as resistance) would come in handyas a selling opportunity. An extension below 103 wouldplace the CAD in a void with no real supports until

97.50/96.00 which then could be tested. -5


Historically the Canadian dollar has correlated positively

with general risk appetite and the performance of the USequity market, appreciating with improving risk appetite.However since last year this relationship has brokendown. On the other hand with rapidly increased USproduction of crude oil and shale gas Canadian exportsmay suffer. With its tight connection to the US economyone would traditionally expect the Canadian economy toimprove on the back of a more benign outlook for USgrowth. However, a study by the BOC indicates thatprimarily this relationship is related to growth in UScapital spending, which so far has failed to pick up.Therefore, should US capital spending start to improvethis year it may benefit the Canadian economy and its

currency.


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Technical view: BOE CAD indexWeekly QCADBOEEER= 2008-07-18 - 2014-08-01 (STO)

103,70 100,0%

96,10 161,8%

103,1050,0%

1 ,50,0%

93,41100,0%

Price

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90,00

95,00

100,00

105,00

110,00

115,00

104,40

110,26

2009 2010 2011 2012 2013 20142000 2010

19



Currency Strategy

Australian DollarSince April 2013 the AUD has depreciated by

approximately 17% against the USD to trade currentlyaround 0.88. While this was triggered by changedexpectations on monetary policy and weaker Chinese

growth, Fed tapering fears have also contributed to aweaker AUD. The central bank governor has told hethinks the fair value for AUD/USD is around 0.85 and weagree.

ECONOMIC FUNDAMENTALS The Australian economy

has been growing slightly below trend for the past year.Household spending remains cautious while businessinvestments outside the mining industry have shownsigns of increasing following weakness last year. Still,investment intentions have not improved significantlywith mining related investments probably set to fall evenfurther. Retail sales growth has risen but remains well

below rates seen before the 2008 financial crisis. Thelabour market is still soft with growing unemploymentnow back at previous 2009 highs and labour participationfalling. However, increasing hours worked suggests

labour demand is improving. +2

MONETARY POLICY Last year, the RBA lowered its cash

rate twice to 2.50%, further reducing the positive rategap against other central banks. Evidence suggests theAustralian economy has reacted positively to the policychange. House prices have begun to rise; in Q3 prices ofestablished houses were almost 8% higher than a yearago. Consequently, housing credit growth is improving

once again. The RBA’s decision to cut the cash rate in Q1was probably due to low inflation, the AUD’s highvaluation and deteriorating terms-of-trade attributable tolower commodity prices. Wage pressure has remainedweak and there are very few signs of increasing costpressure and inflation. We therefore believe the RBA willremain on hold for the foreseeable future to support theeconomy and prevent the currency from appreciating.The RBA governor has stated he believes the AUD/USD tobe fairly valued at around 0.85. However, as this view iscurrently reflected in market pricing we regard monetary

policy as neutral for the AUD. 0

FLOWS Capital inflows have been supportive for the

Australian currency for several years. A combination ofstrong fundamentals and an above average yield haveattracted bond-related inflows while capital spending bythe mining industry has generated large FDI inflows.However, falling interest rates after rate cuts from theRBA, Fed tapering and lower capital spending oncommodities have eroded these positive flows. As alwaysAustralia suffers from a persistent current account deficit,which makes the currency vulnerable when financial

flows are reduced. 0


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Currency Strategy

Australian dollarVALUATION The combination of strong fundamentals,high commodity prices and interest rates above averagekept the AUD well above its long-term fair value for yearsas Australia attracted large capital inflows. However,lower commodity prices have depressed terms of trade

significantly from its highs. Moreover mining relatedinvestments appears to have peaked and weakerdomestic demand has triggered several rate cuts from thecentral bank to support the economy. Altogether weakergrowth, falling national income and a lower rateadvantage eventually undermined the stretchedvaluation of the AUD. The correction has pushed thevaluation towards our estimated long-term fair value. TheRBA-governor has been rather explicit about his view onthe fair value in AUD/USD, which he sees around 0.85.However, valuation in itself is unlikely to serve as driver

for the AUD going forward. 0

POSITIONING Speculators positioning in the AUDtumbled in 2013 from a net long to a net short position.Since data began pointing toward December tapering bythe Fed, the net shorts have been added to. The position

increase has been steady. 0

TECHNICALS The decline from last year’s high looks likeunfinished business. If repeating that move (quitecommon behavior) the ongoing second leg lower wouldmatch a 2008-2013 50% retracement near the 88-level.In the short-term the move has distanced the nowdeclining yearly average by a little too much, butmedium-term shorts should see through the danger of a

short-term correction. A move back over resistance at105.90-106.60 would complicate the outlook and reduce

the negative grade. -4


In terms of valuation the AUD has moved close to itslong-term fair value after domestic growth slowed andthe central bank continued to ease monetary policy.Previously the high valuation of the currency wasaccepted by the central bank as terms of trade reachedhistorically high levels. However, falling commodity priceshave reduced terms of trade, which has dragged thecurrency lower. Despite being closer to a more reasonable

valuation the AUD remains an example of currencies thatwill suffer if the USD appreciates on the back of furthertapering by the Fed. On the other hand it would have thepotential to appreciate if the Chinese economy improvesand commodity prices would start to rise improvingAustralian terms of trade.


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Technical view: BOE AUD INDEX Weekly QAUDBOEEER= 2008-07-18 - 2014-08-01 (STO)

87,90 100,0%

93,7550,0%

88,1961,8%

Price

.12

75,00

80,00

85,00

90,00

95,00

100,00

105,00

110,00

115,00

98,40

106,41

2009 2010 2011 2012 2013 20142000 2010

21



Currency Strategy

New Zealand dollarThe New Zealand economy continues to strengthen with

growth having acquired considerable momentum.Domestic demand is supported by low interest rates,increased construction activity, high export commodity

prices and rapid house price inflation. RBNZ has twomajor opposing concerns; high house price inflation andthe strong New Zealand dollar. However, the bank hasstated that current monetary stimulus is becomingunnecessary.

ECONOMIC FUNDAMENTALS Q3 2013 GDP rose by

1.4% q/q, 3.5% y/y, which was stronger than the marketexpected. RBNZ forecast growth of around 3% until early2015 after which it will moderate. PMI manufacturing at56.7 points at an upbeat expansion (all sub-indices andall regions) while terms of trade stands at a 40-year high,driven by rising export commodity prices, especially for

dairy products, which are projected to remain firm oreven increase over the next year, according to Fonterra.Unemployment, currently at 6.2% is projected to declinetowards 5.7%. The construction sector is strong with thepost-earthquake reconstruction in Canterbury andhousing boom influenced by net inward migration andlow interest rates. Inflationary pressure is starting to buildas the economy strengthens with annual CPI increasingto 1.4% in Q3, still inside the bank’s target zone (1-3%).The central bank imposed restrictions on high loan-to-value (LVR) mortgage lending in October 2013 to reduceannual house price inflation. The first evaluation will take

place in March. +3

MONETARY POLICY RBNZ has left its policy rate on holdat 2.50% since March 2011. The bank is struggling todampen high house price inflation: an LVR restriction wasintroduced in October to help curb credit growth. Alsoproblematic is the high exchange rate (20-25%overvalued) which the bank regards as unsustainable inthe long run. In its December monetary policy statementit said it will increase the OCR as needed to keep inflationnear 2%. With robust GDP growth and inflation movingtowards the midrange of the bank’s comfort zone it mayneed to tighten monetary policy (current policy rate:

2.5%). However, the market also discounts three ratehikes (3*25bps) for 2014, which might be too aggressivetaking into the account the elevated level of the currency.

Monetary policy is therefore neutral. 0

FLOWS The current account deficit increased in Q3 to a

post-2008 high (4.1%/GDP Q3 2013, RBNZ forecasts3.9%/GDP 2014). Foreign holdings of NZ governmentdebt however again rose (Nov 63.5%) after having beentrimmed down from 66% last summer. Financial inflowsfrom the Canterbury earthquake insurance settlementclaims will still have a positive impact but (with 2/3settled by end-September) are expected to become less

important after Q1. -2


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Currency Strategy

New Zealand dollarVALUATION For a long time we have argued that theNZD is overvalued and poised to correct lower. Althoughthe New Zealand central bank (RBNZ) is concerned forthe long-term effects of an expensive currency, they

consider rate changes an inappropriate way to target theexchange rate. Instead the RBNZ occasionally hasintervened in the FX market to prevent the currency fromappreciating further. According to our long-term fairvalue model, the NZD trade weighted index is 20-25%overvalued against our long-term estimate. Just as theAUD and the JPY previously have corrected toward theirfair values, the NZD will eventually also correct towards amore reasonable valuation. However it will probably nothappen just yet as rising house prices and a strongeconomy have increased expectations that the RBNZ willbe among the first central banks to hike rates, which we

doubt.

-5 POSITIONING Despite the strong surge since summer,speculative accounts this time have been much morereluctant to rebuild longs (not even close to the extent,seen before the April – June decline). With the picturerelatively rosy for the NZD, the market might actually

realize that it risks missing a buying opportunity. +1

TECHNICALS The BOE NZD index currently stands at

record levels. The strong surge from the June low pointhas fully repaired the losses incurred last spring.Underpinned also by the rising yearly (52w) movingaverage, there seems to be little preventing the currencyfrom continuing higher, at least in the short– & medium-term. A possible price target would be 127, which is thepoint where the 2000 - 2007 advance and the 2009 –

2013 will be equal, a common relationship. +1

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE

Continued growth in the US and in Asia will likelycontinue to underpin NZ export. China has now passedAustralia as the number one export destination (dairy andlumber are two main export products). Terms of trade willcontinue to improve as the price of especially dairyproducts will remain at elevated levels whereas especially

important energy is likely to fall. Rising import volumeshave however widened the C/A deficit during the lastquarter. With global risk appetite seen rising, event risksshould be declining. Macro prudential measures to curbthe house price inflation have been implemented butthose have been in effect for a too short period of time totell the impact (the measure is seen as equivalent to a 30bps OCR hike). Rising interest in investing in NZgovernment debt and the relatively high level of interestrate has pushed the currency higher since last summer.The elevated level of the currency is the main reason forthe RBNZ having not hiked the OCR and why they willremain reluctant to do so. All in-all the risks attached tothe NZ economy seems to be well contained.


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Technical view: BOE NZD index

Price

75

80

85

90

95

100

105

110

115

120

2002 2004 2006 2008 2010 2012 2014

2000 2010

23



Currency Strategy

Swiss FrancUpward pressures on the Swiss franc are abating but

slowly, despite many months of declining risk premia inthe Euro-zone. At current levels it is still highly valuedalthough significantly less than previously given thecontinued low Swiss inflation. We therefore expect theSNB to remain ready to defend the minimum exchangerate with the outmost determination. If our main scenarioof a slow but steady stabilisation in the euro area provescorrect, the CHF has room to weaken.

ECONOMIC FUNDAMENTALS In Q3 2013 the Swiss

economy continued to expand, growing 0.5% q/q. Theincrease was broad-based with domestic consumption,gross capital spending and net exports contributingpositively. Indeed, headwinds affecting Swiss exportersdue to the strong currency appear to be gradually

receding. We forecast GDP growth to increase from 1.9%in 2013 to 2.3% in 2014 and 2.7% in 2015. This shouldhelp reduce the unemployment rate from 3.2% in 2013 to2.8% by the end of 2015. In such a favourableenvironment, public budgets should remain balanced.Solid economic fundamentals continue to support the

Swiss franc’s safe-haven status. +1

MONETARY POLICY The SNB maintained its monetary

policy stance at its December 2013 meeting. The targetrange for the 3m libor remained unchanged at 0.00-0.25% and the minimum EUR/CHF exchange rate at 1.20.The central bank forecasts inflation rates of 0.2% and

0.6% for 2014 and 2015, respectively, indicating thereare no upside risks to inflation in the medium-term. Itexpects the Swiss economy to grow by around 2% thisyear with downside risks to the outlook prevailing.Consequently, we believe the SNB will keep its monetarypolicy stance unchanged in 2014. If necessary, the bankwill continue to defend the minimum exchange rate withdetermination. As long as EUR/CHF trades above the1.20-floor monetary policy must be considered neutral.However, on the back of a renewed appreciation pressureon the franc taking it close to 1.20, it would turn

massively negative. 0

FLOWS In the first three quarters of 2013, the Swisscurrent account reported a surplus of CHF 60.6bn,exceeding the total surplus for 2012 by CHF 3.5bn. Forthe whole of 2013, it may total CHF 80bn or 15% of GDP,providing strong support for the currency. For more thanone year, the SNB has felt no need to intervene incurrency markets. Still, reserves are likely to increasefurther in coming months as income from reserves isreinvested. The Swiss franc has remained resilient despitea more positive global macro outlook, with foreigners still

very interested in the safe haven currency+2


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Currency Strategy

Swiss FrancVALUATION After being considered one of the mostovervalued currencies a few years ago our long-term fairvalue estimate has moved towards market pricing

indicating there probably are fundamental factorsbacking the persistent strength of the Swiss franc. Themajor contribution comes from low real interest ratescombined with low inflation outside Switzerland, whiledomestic economy has continued to grow despite thestrengthening of the currency. Currently our SEBEER-model estimates indicate USD/CHF and EUR/CHF at 1.02and 1.28 respectively. This development is also confirmedby the development in the nominal trade weighted indexfor the CHF. From previously being substantially above itsnominal trade weighted index the CHF is currently morealigned with its long-term trend confirming the changesin the SEBEER estimate. Nevertheless, valuation willeventually drag the franc lower although the downsidepotential is substantially smaller than what we estimated

only two years ago. -1

POSITIONING A rare net long CHF positioning built in

November and December has over the past weeks beenalmost neutralized. The negative trend this sharp change

has created, provides the negative score for CHF. -1

TECHNICALS The swissy keeps its medium-termmeandering around an at large flat yearly average andexcessive moves away from it (on both sides) arerepeatedly rejected. If not breaking into/below the

average in a shorter-term perspective, a cautious positivegrade would be warranted. 0

LIQUIDITY, EVENT RISKS AND GLOBAL CYCLE The

Swiss franc remains a prime destination for capital aslong as there is no definite end to the debt crisis inEurope. Fundamental data are as sound as ever,underscoring the role of the CHF as a safe haven. TheSNB will maintain its monetary strategy and it willcontinue to defend the EUR/CHF minimum exchange rateof 1.20 while it is highly unlikely that the floor will beraised anytime soon.


Technical view: BOE CHF index

Weekly QCHFBOEEER= 2011-09-30 - 2014-04-11 (STO)

Price

.12

141,00

142,00

143,00

144,00

145,00

146,00

145,00

144,25

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22011 2012 2013 2014

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Currency Strategy

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Swedish kronaThe krona weakened late 2013 as the ECB cut rates andSwedish inflation continued to surprise on the downside,forcing the Riksbank to bow to increasing pressure tolower rates. When the actual rate cut was delivered onDec 17, the krona bottomed out. Its trade-weighted value

has since recovered by almost 3.5%. We maintain apositive outlook for 2014 although most appreciation isexpected in the latter part of the year.

ECONOMIC FUNDAMENTALS While growth in 2013 isset to be weaker than we first thought, most leadingindicators suggest a solid recovery this year. SEB projectsSwedish GDP to increase by 2.5% in 2014 and 3.3% in2015. The recovery will be broad-based and previousweak export performance will improve. GDP however willmainly be driven by domestic factors, including privateconsumption, investments and government spending.

The labour market has been surprisingly strong and weexpect continued employment growth. This will havehawkish implications for Swedish monetary policy in 2015as growth is once again more dependent on domesticfactors. Strong fundamentals have encouraged foreigninvestors to buy Swedish bonds and equities. We expectthese purchases to be maintained though they will notplay as important a role for the SEK as in recent years.Only a major house price collapse (not in our forecasts)would likely result in heavy selling by foreigners of theiralmost record high Swedish asset holdings. +1

MONETARY POLICY At last, monetary policy clearly

reflects the prospects of continued low inflation at theexpense of household credit growth/financial stability. Assuch the Riksbank retains an easing bias, although we donot expect further cuts. Monetary policy will therefore failto provide the SEK with any tailwind until H2 2014 at theearliest, and the risk for continued low inflation surpriseswill be a SEK negative. The central bank is still veryrelaxed regarding krona developments; once again thereason the Riksbank wishes to avoid a much strongerexchange rate is mainly the risk of low inflation. Thecentral bank expects inevitable monetary tightening in

2015 to drive EUR/SEK towards 8.50 next year. -1

FLOWS The current account surplus remains around 6-7%/GDP. Since 2010, both goods and services accountshave stabilised at 2.5% and 3.5% respectively, while netinvestment income has increased from 2% to almost3%/GDP. Net FDI however remains negative in the basicbalance. In Q3 2013 Swedish reinvested earnings(outflow) accounted for SEK 20bn, compared with a SEK54bn current account surplus during the same quarter.Taking net errors and emissions into account (-SEK 37bn),the current account is flat. Furthermore, Swedishcompanies retain large FX deposits. Therefore overall, thelarge surplus overstates the positive flow effects for the

SEK. Given the pro-cyclical state of the currency and theimproving export outlook we regard flows as slightly

positive for the currency. +1

26



Currency Strategy

Swedish kronaVALUATION Since summer the krona has weakened andin trade-weighted terms the krona appears somewhatundervalued compared to our estimated long-term fair

value. Hence, valuation is not an obstacle for furtherappreciation if the global business cycle continues toimprove. Our estimate of the long-term fair value inEUR/SEK is 8.30, which we think is reachable in mediumterm. Based on valuation alone one should not expect any

larger SEK moves. +1

POSITIONING The proxy for speculative positioning

indicates that speculators are slightly long SEK vs. USD.The most recent change was a reduction of the longposition but price action since then indicates that the netlong position was likely increased. As the absolute size ofthe net long position still is quite small and there is no

clear trend, the positioning score is a neutral zero. 0

TECHNICALS The TCW index holds over the flat yearly

average and as long as this is the case the medium-termoutlook remains SEK negative. A convincing weekly closebelow the average (117.30) would neutralize, but thescenario would not become SEK bullish without violation

below SEK resistance at 115.20. -1

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE As FederalReserve tapering is approaching, liquidity and flight tolarge currencies has been a theme on FX markets. In thiscontext, SEK has been punished as a small and illiquid

currency but not to the same extent as some of the otherperipheral G10 currencies. The main risks for the kronacurrently are 1) Adverse developments on the Swedishhousing market which could trigger foreign investors tosell some of their record-high holdings of Swedish bondsand equities. We still attach a low probability to this eventhappening. 2) Continued positive (low) inflation surpriseswhich would trigger and force the Riksbank to lower ratesadditionally. Given the pattern of speculative accountstrading SEK on the prospect of changes in Riksbankmonetary policy, this in our view would be one of fewreasons why EUR/SEK would trade back above 9.00again.


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Technical view: TCW index Weekly Q.TCW 2012-06-22 - 2014-03-28 (STO)

Price

SEK

.12

113,00

114,00

115,00

116,00

117,00

118,00

119,00

120,00

121,00

122,00

117,78117,29

Q3 Q4 Q1 Q2 Q3 Q4 Q12012 2013 2014

27



Currency Strategy

Norwegian kroneSince the June

rate decision the NOK has depreciated by

around 8.5% against the EUR. Negative data releases andpersistent dovish monetary policy surprises have weighedon the krone. A large share of speculative NOK tradinghas resulted in unusually high volatility. We expect

economic data to gain importance as the highly uncertainmacro outlook justifies Norges Bank in retaining its easingbias. Although we do not share the market’s view,expectations of a possible rate cut will continue to weighon the NOK in the near-term. The flow outlook has beennegative as foreign banks have aggressively net sold NOK.Improved risk appetite and Brent oil prices remainingabove USD 100/b (as we forecast) may help supportequity related flows. We expect EUR/NOK to range-trade8.30/8.60, with few signs suggesting (just yet) asignificant recovery in the NOK. Instead, we recommendbuying EUR/NOK on dips, due to the prevailing economic

uncertainty.ECONOMIC FUNDAMENTALS The krone has sufferedfrom poor Norwegian economic momentum; growthhalted last spring. It should recover in the spring thoughincreases in mainland GDP this year will remain belowtrend at 2.4%. Further, this is contingent on a pick-up inhousehold spending which has yet to materialize. Solidhousehold disposable income and employment growthwill help facilitate such a recovery. Although investmentgrowth in the oil sector will slow, it will be partly offset byhigher non-oil exports, due to increased foreign demandand a weaker NOK. While we do not anticipate substantial

decline in house prices, we accept the outlook isuncertain. Without continued negative data surprises

fundamentals will be a small positive for NOK. +1

MONETARY POLICY Once again, Norges Bank presented

a dovish rate path in December, not expecting a rate hikeuntil mid-2015. Considering the highly uncertaineconomic outlook, the bank will retain its easing bias inthe short-term. Going forward, the market will probablycontinue to discount a small likelihood of a rate cut,although we do not subscribe to that view. Instead, weexpect rates to remain unchanged until March 2015although risks of a cut cannot be ignored. As growth

indicators improve, monetary policy uncertainty shouldrecede and NOK volatility surrounding the bank’s ratedecisions decline. Without a rate cut monetary policy will

be neutral for the currency. 0

FLOWS Flows have been negative, due to further net NOK

sales by foreign banks. Fundamentally, continuedaggressive foreign selling of Norwegian assets is hard to justify. Less likelihood of central bank “interventions”,declining NOK volatility and rising risk appetite shouldhelp reverse the negative flow outlook. During the last 6-12 months the krone has also tended to depreciate everytime speculators have reached a long currency position,

which limits a NOK appreciation near-term. 0


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Currency Strategy

eric

Norwegian KroneVALUATION Our long-term valuation model suggests

that the krone appears cheap relative to its long-term fairvalue, especially after NOK-weakness this summer.Normally current valuation would be viewed as a strongsignal to buy the krone. However, with a central bankfavouring a weak currency and the special arrangementsconcerning oil related incomes make it more difficult toargue in favour of the NOK from a pure valuationperspective. Furthermore Norwegian competitiveness isstill weak as its relative ULC has increased substantially.+1

POSITIONING The proxy for speculative positioning inNOK indicates that the market is slightly short NOK.However, the most recent changes have takenspeculators from a net long to a net short positioning

quickly. 0

TECHNICALS The Norwegian index remains on anascending trajectory with the yearly average lagging (far)behind with a NOK negative slope. The move higher hastaken the shape of a wedge which is an early sign of lossof momentum and the distance to the average is as saidpronounced which may be deemed as a stretch. But whileholding above the drawn ascending line of support(92.70) and recent lows at 92.20, there are no strong

arguments to ease the negative NOK score. -3

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE. The

greatest risk to NOK is clearly an unexpected rate cut onback of weaker GDP growth prospects. Core inflation willremain close to but below target in 2014 giving thecentral bank flexibility to focus on growth. The bank’sDecember rate path put the key rate stable at 1.50% untilH2 2015, meaning the bank is one step closer to cuttingrates should economic growth deteriorate further. Thehousing market is a wild card: Norges Bank’s forecast iseven more optimistic than ours (10-15% gradual pricedecline from the nominal peak), leaving room fordisappointments. Market is currently discounting a 30-40% probability for a 25bps cut in March. However, thisis likely not reflected to the same extent in the currentexchange rate meaning such scenario would weaken the

NOK. In addition, substantial drop in house prices couldtrigger foreigners to reduce exposure in NOK-denominated bonds.


80

85

90

95

100105

110

115

120

125

130

2000 2002 2004 2006 2008 2010 2012

SEBEER Long-term Fair value, NOK Index

NOK Long-term Fair value

Technical view: NOK Index (I44)

Weekly Q.NOI44 2012-09-28 - 2014-02-28 (STO)

Price

.12

85,00

86,00

87,00

88,00

89,00

90,00

91,00

92,00

93,00

94,0094,03

89,40

o n d j f m a m j j a s o n d j f

Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14

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Currency Strategy

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Danish KroneThe overall trend of increasing tranquillity in the Euroarea is still an important theme in understanding thedynamics of short term moves into the Danish Krone. In2014 ‘safe haven’ flows is not expected to play a major

role. Strong fundamentals, improving economicconditions and very sound current account position dounderscore the benign position of DKK. Trading in theupper end of its band versus EUR, we see slightappreciation ahead.

ECONOMIC FUNDAMENTALS Although 2013 as a whole

is expected to produce a 0.5% GDP expansion, theDanish economy did end the year on a stronger footingthan this number indicates. Consumption is still sluggishbut expected to improve as past years significant fiscalausterity ends. Fiscal position is expected to be in balancein 2013 as well over the coming years and combined with

low public debt to GDP, this stands out on the positiveside. High private debt is still a risk longer term, but in therate environment we see ahead, not an acute one. GDP

growth is expected to be above 2% in 2014-2015. +1

MONETARY POLICY EUR/DKK is allowed to fluctuate by+/- 2.25% around its central parity (7.46038), but inpractice DCB has maintained a tighter range (7.465 toaround 7.425) since the euro was introduced. Sincesummer 2013 the currency drifted towards the higher endof the range (around 7.46). The deposit rate stayednegative at -0.10% and below the ECB’s zero-rate. Policylending rates converged gradually during 2013. Due toweak inflation dynamics and slow recovery in the euroarea SEB expects ECB to start a QE program in Q2. In thiscase DCB might have to ease policy to keep the Kronefrom appreciating. With stronger fundamentals bothfiscally and externally monetary policy must be the(negative) factor counterbalancing an upward pressure of

DKK versus the euro. -1

FLOWS Although fluctuating more in 2013 the tradebalance stayed on average close to the level of prior years– around 5-7 DKK bn a month. However, the incomecomponent of the current account keeps growing as

years of significant trade surpluses adds to net foreignassets. While Danish exports should grow with SEB’smore favourable global economic outlook, improvingdomestic demand is expected to counter this effect.Portfolio flows will likely be a continued mild headwind asinvestors’ fear for a renewed escalation of the euro crisisdiminishes further. +1

30



Currency Strategy

Danish KroneVALUATION According to nominal valuation DKK istrading at fair-value, although in real terms the currencyis slightly overvalued. However, the chronic trade and

current account surpluses suggest that DKK isundervalued and that part of the conclusion from the realeffective DKK is due to measurement problems withproductivity and terms of trade (Danish exports haveincreased in price versus imports). Putting it together we

see valuation as neutral. 0

TECHNICAL VIEW EUR/DKK is in the final stage of a DKK

negative five-wave sequence. A turnaround in EUR/DKKis expected from somewhere between 7.4650 & 7.4750.Once this “final” move is completed, there would be room

for DKK strength. +1

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE.

DKK is a less liquid market while the global cycle is likelyto be neutral to DKK (same score as EUR). In later yearsEUR/DKK has been negatively correlated to Eurozoneuncertainty and investors have bought DKK as a hedgeagainst an EMU break-up. If the expected improvement inEurope continues, some safe-haven related flows mayleave Denmark. However after 1½ years the Draghi ‘dowhatever it takes’-speech, FX reserves in DK is justslightly below the peak seen in mid-2012. Higher ratesthat could trigger renewed troubles among indebtedDanish household is the biggest single event risk.


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Technical view: EUR/DKK

Weekly QEURDKK=D2 2012-02-24 - 2014-03-28 (STO)

7,47100,0%

1

2

3

4

Price

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7,44

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7,46

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Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2012 2013 2014

31



Currency Strategy

Russian roubleThe rouble is likely to weaken against the basket overcoming quarters. The external position is strong withmassive FX reserves, but the current account surplus isnarrowing and capital outflows continue. The enviablylow public indebtedness is no longer in focus. Instead,investors´ fundamental yard stick is growth and structuralreform progress – two areas less flattering for Russiatoday. Likewise, another former RUB-supportive factor –carry – is lending little support for the rouble as long as itis out of focus for markets. The central bank will cut ratesand seems tolerant of additional currency weakness aslong as it is gradual. Valuation has improved, but outsidethe natural resource exporting sectors, internationalcompetitiveness is still an issue and depreciation isrequired to compensate for higher inflation and wagegrowth than elsewhere.

ECONOMIC FUNDAMENTALS After six consecutive

quarters of decelerating GDP growth and a flat reading of1.2% y/y in 3Q 2013, the economy is set to recover.However, the recovery is likely to be modest and growthwill only reach levels that are far below the performancebefore and after the Great Recession. Indeed, we expectGDP to rise by only 2.3% in 2014 compared to 1.4% lastyear. Retail sales growth has stabilised at 3-4% and issupported by a tight labour market, still strong real wagesand elevated consumer confidence. Credit growth tohouseholds has eased but remains strong at 30% y/y.Private consumption is, hence, likely to remain a keydriver of the economy. Real investments and industrialproduction, however, are stagnant and manufacturing

PMI fell to a 4-year low of 48.8 in December. It isencouraging that both the central bank (CBR) andgovernment representatives now fully acknowledge thestructural causes of this sharp slowdown. Unfortunately,there is little reason to expect any material progress onstructural reforms that would bolster investments,

productivity and growth for now. 1

MONETARY POLICY The new CBR head has proven moreindependent than expected. With CPI (6.5% in Dec.) stillabove target, policy rates have been on hold despiteweak growth. CPI will, however, fall towards the newtarget (5% +/- 1.5pp for 2014) and we expect the policyrate (and corridor) to be cut by 25bps each in 3Q and 4Qfrom 5.5% now. Market rates and yields are elevated butthis is only marginally RUB-supportive since carry is (andwill remain) a weak FX driver. 2014 is the year oftransition to inflation targeting and a free-floating roubleby early 2015. The fluctuation band for the basket/RUBhas been lifted repeatedly since last summer (33.30 –40.30 now) as the CBR intervenes in support of the RUB.Still, the CBR clearly tolerates continued RUB weaknessas long as movements are gradual. We expect the band tobe widened further and to be dismantled during the

course of the year. 0

FLOWS The latest C/A data showed a surplus of USD1.1bn in 3Q 2013. This compares to 5.8bn in 3Q the

EUR speculat ive p osit ions

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Currency Strategy

Russian roubleprevious year. The C/A surplus to GDP probably fell byhalf in 2013 to about 2% and it remains on a decliningtrend. Oil production and prices are edging down (weexpect Brent at USD 102.5 p/b this year) while imports are

held up by consumption. Meanwhile, the CBR hasestimated that capital outflows reached USD 55bn in2013. We see little reason to expect a sharp reduction thisyear. Overall, this has left FX reserves fairly stable overthe last half year at around USD 510bn. Overall, flows arestill supportive and during 1Q seasonality is positive for

the RUB. +1

VALUATION Recent RUB weakness has improvedvaluation both in nominal and real terms. Indeed, theNEER measure is almost back to the bottom in early2009. In real terms, current valuation is also below the10-year trend, which is on a rising path due to excessiveRussian inflation. The real value of the rouble is not aproblem for the natural resource extracting businesses.They are price takers on the global market and they sellall they produce. However, the REER is too strong for theother sectors of the economy that are exposed tointernational competition. Indeed, the economy issuffering from the so called Dutch Disease. The long-termremedy involves diversification and will require muchmore far reaching structural reforms than the ones

currently under way. Valuation now scores: 0

POSITIONING The RUB proxy speculative position

indicates that speculators are short RUB. The trend is fora continued build-up of the short position and as the sizeof the short position currently is rather limited there isroom for more negative RUB sentiment before any excesslevels in positioning is reached. The slightly negativescore is due to the speculators’ bearish sentiment

towards the RUB. -1

TECHNICALS The rouble is on a losing track measuredagainst its index. The yearly average is sloped negativelyto the rouble and even if the distance to the average ispronounced, there are no signs visible that things willturn to the better for the currency. Acceleration through

RUB support at the 39-level would open up for extensiontowards 40.50 while a less expected drop under 37.60

would ease the negative grade some. -5

EVENT RISK, LIQUIDITY AND GLOBAL CYCLE The keyevent risk for the rouble is if oil prices were to fall sharply.We expect oil prices (Brent) to fall slowly towards USD100 p/b in 2015, but the shale revolution poses a risk offurther declines. Episodes of flight to liquidity typicallydamage the rouble significantly which is aggravated byconcomitant increases in capital outflows. Domesticpolitical tensions are likely to increase over time as poorgrowth prevents continued rapid increases in living

standards and as the opposition gradually gets organised.Terror attacks, such as those in Volgograd in Decemberhave largely left the RUB unaffected for now.


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The lack of significant upside progress inEUR/USD makes the current substantial netlong speculative position a burden. Shouldthe sub-1.29-area be revisited, speculativelongs will have to be reduced.Technical view: RUB vs. basket

Weekly QRUS= 2009-02-27 - 2014-06-13 (STO)

Price

RUB

.1

32,0

34,0

36,0

38,0

40,0

42,0

38,8

36,7

2010 2011 2012 2013 20142000 2010

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Chinese YuanCNY has been the star currency last year even in the faceof stronger USD and weaker emerging market currencies.We have held a long CNY vs. USD 1M NDF since July andwe continue to hold this position in 2014. Our 2014 year-end target on USD/CNY is 5.90. The key to CNY strength

is the central bank tightening faster than the Fed and risein US yields. China has been tightening monetaryconditions to reduce imprudent lending from banks andshadow banking. China is also liberalizing interest rates,which lead to higher rates since artificially low depositrates will be free to rise according to market forces. Inaddition to relative tighter monetary policy, CNY shouldappreciate from structural policy to encourage exportersto move up the value chain, reduce accumulation of FXreserves and US Treasury as the Federal Reserve exitsQuantitative Easing. Our CNY trading strategy is to belong CNY 1M NDF since it is less sensitive to global

monetary policy volatility such as possible accelerating intapering by the Federal Reserve.

ECONOMIC FUNDAMENTALS Growth decelerated in Q4to 7.7%yoy from 7.8%yoy in Q3. Q3 growth was helpedby resurgence in domestic construction activity since thegovernment started small and targeted adjustments tosupport growth and that effect is wearing off. Goingforward, we see growth slowing from monetarytightening and deleveraging despite stronger exportsfrom better US growth. Also, with land reforms andproperty tax implementation, the initial reaction willreduce construction activity. Our growth forecast for

2014 is 7.4% compared to 7.7% in 2013. +1

MONETARY POLICY Monetary conditions have tightened

from higher interbank rates and authorities reducing thegrowth in non-bank lending, the biggest driver ofmonetary stimulus since early 2012. The measures are toenhance transparency and limit non-bank lending. Inaddition, with interest rate liberalization, artificially lowdeposit rates will be l ifted and tighten monetary

conditions. +1

FLOWS The external balance remains CNY positive asChina runs a current account surplus of around 2% ofGDP. With export recovery, China’s trade surplus willremain high and keep the current account in a steadysurplus. Furthermore, capital flows and hot money aremoving towards China again as RMB denominated assets,especially property perform well. Property price increasewill slow but it will remain positive and continue to attracthot money inflow. It also helps that CNY continues itssteady appreciation in spite of increased volatility and

depreciation in most EM currencies. +2

-30

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0

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20

30

40

50

07 08 09 10 11 12 13

SEB China construction indicator

% yoy 3mma

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3

4

5

6

7

8

9

10

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Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

7day repo rate % 20d mvavg

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-2

0

2

4

6

8

10

12

03 04 05 06 07 08 09 10 11 12 13

China BOP % of GDP

Current Account Capital flows ex FDI

34



Currency Strategy

Chinese YuanVALUATION According to NEER and REER models, CNY isover-valued since CNY has appreciated considerably overthe last 5 years. However, as long as CNY runs a healthy

current account surplus, FX reserves are rising and officialfixing on USD/CNY remains higher than the more marketdriven spot markets, we think CNY is under-valued.Overall, this results in a valuation score of zero. 0

POSITIONING Positioning differs by market. First, theimplied carry on USDCNY NDFs is a small negative, whichmeans that offshore investors are positioned for a lowerUSDCNY. Second, onshore are already positioned forUSDCNY lower since the spot market continues to hugthe bottom of the allowable daily trading band of +/- 1%.Third, offshore CNH position is biased to short USDCNHsince CNH offers positive carry and has been stable in the

recent EM sell-off. RMB deposits in Hong Kong are alsosteady meaning people are accumulating CNH. -1

TECHNICALS The 1yr USD/CNY NDF contract hasextended the decline well below prior support at the 2008low of 6.2370. The move looks like a “Wedge” (whichindicates lesser momentum and in turn highlights thereaction risk). The distance to the (negatively sloped)yearly average might be a bit too steep and a reason forthe market to soon start consolidating a medium-term

excessive move. +3

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE. The yuan

is often seen as a strong currency to hold in liquidity crisissince CNY pegs to the USD in times of stress. However,for forward investors, the CNY can sell off quite a bit andlose value. The key risk for China this year isdisappointment on reforms. A bold reform direction wasset in November by President Xi and now policymakersare busy adding details and setting directions forimplementation. The measures will trickle out over thenext year but markets may be disappointed byimplementation relative to high expectations. On the flipside, reforms such as cleaning up bank lending andshadow banking may be too strong and lead to downsiderisk to growth and monetary easing. Changes always leadto volatility and higher risks.


04 05 06 07


-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


Technical view: 1y USD/CNY NDF

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Sep-1

0

Dec-1

0

Mar-1

1

Jun-1

1

Sep-1

1

Dec-1

1

Mar-1

2

Jun-1

2

Sep-1

2

Dec-1

2

Mar-1

3

Jun-1

3

Sep-1

3

Dec-1

3

UDSCNY spot spread to fixing %

CNY High Low

35



Currency Strategy

Guide to indicators

COMMITMENT OF TRADERS (COT) REPORT

The CoT report (weekly) seeks to describe market

positioning in a currency future on the ChicagoMercantile Exchange. The Exchange’s tradingmembers must state whether their trading purposescomprise either commercial hedging or speculation.Speculators are regarded as either large (non-commercials) or small. We present and analyse thepositioning of large speculators in order tounderstand sentiment in the currency. The chartpresents the net open position (non-commerciallongs less non-commercial shorts). For thosecurrencies not available in the CoT report we havecreated a proxy (see FX Ringside 2006-04-04).

BASIC BALANCEThe basic balance is a flow indicator that includes thecurrent account balance and net flows from bothdirect- and equity investments. The broad basicbalance also includes the private sector’s net trade indebt securities.

EFFECTIVE EXCHANGE RATE (ER)

A nominal effective exchange rate is the value of acurrency against a basket of currencies. The Bank ofEngland calculates the ER using IMF-provided

weights. Each currency is given a weight that reflectsits relative importance in the country’s trade flows.An increase (decrease) in the BoE index reflects anappreciation (depreciation) of the currency.

EXTERNAL DATA SOURCES

The main data providers used in this report are: SEB,

national sources, Reuters Graphics and Macrobond.

SEASONAL PATTERN

We have calculated the seasonal effects using aregression approach. In the regression we have usedthe monthly percentage change in the exchange rateas the dependent variable and dummy variables forthe different months as explanatory variables. Ourdataset consists of end of the month daily close FX

rates over the last 10 years.

SEB STRETCH-O-METER

This indicator shows how stretched a currency pair isby measuring the distance between the current rateand the 200 day moving average expressed instandard deviations. Values in excess of +/-3 are tobe considered over-stretched and often signal anincreased reaction/reversal risk.

36



Currency Strategy

SEB INTERNAL FX FLOW ANALYSISFX is an over-the-counter (OTC) product. Consequently,neither volumes nor flows are readily available. For G7currencies, positioning data provided weekly by the

Commitment of Traders (COT) report are widely used asa proxy for investor flows and positioning. However, noCOT data for SEK is available. We have therefore built ananalytical framework around our own flows which we useto assess market sentiment and positioning for SEK.

Speculative flows still the main driver of EUR/SEK.Foreign financial flows have generally been the maindriver of EUR/SEK throughout 2013, reacting primarily tochanges in the Riksbank’s outlook for monetary policy.Since 2013 there are generally three distinct periods: (1)The period running up to the Riksbank rate decision inApril where the only client category with net SEK buyingof any significance were Foreign financial institutions(market participants of a more speculative nature and themost resembling client category to the ones covered inCOT’s speculative positioning data). (2) After the (dovishApril Riksbank rate decision, foreign financials were, onthe contrary, the only client category net selling SEK. (3)December and January when Foreign financialinstitutions began to buy SEK again.

The chart below shows how Foreign financials weeklyaggregated net flow and EUR/SEK have to followed eachother closely in 2013. Therefore, we assume that mainly

speculative flows have been responsible for the SEK upsand downs during 2013. If assuming that speculatorswhere positioned neutral at the beginning of the yearthey would, based on our flows, have been very short SEKvs. EUR in the beginning of December and but have inJanuary began to scale down their short position.

The other main client category which we follow closely isDomestic corporates. They have been buying SEKincreasingly since it approached what we previously haveexpressed as good hedging levels (around 8.80-9.00).However these flows still appear to be too small in a

global context to yet have a larger impact on EUR/SEK.Though with our view of a continued recovery of theglobal economy in 2014 these flows ought to increase insize and at least provide a larger support for SEK.

Background information framework

Input data: Since SEB’s share of trading in SEK is large,our order flow and FX tick database may providesignificant information regarding market sentiment inSEK crosses. Consequently, we aggregate tick-data ondaily, weekly and monthly basis.

Measures: Using input data for net flows (all buy ordersminus all sell orders during the period in question) andvolume (all buy orders plus all sell orders during the sameperiod) we work with four indicators to provideinformation on client SEK sentiment and positioning:

• Net flow (%): Net flow / volume

• Volume index: Volume / average volume• Volume weighted net flow: Net flow(%) x Volume

index

• Aggregated net flow (position proxy)

Client categorization: Of course, while total net flowand volume are interesting, we believe (a view alsosupported by research findings

1 and in-line with how

Commitment of traders data widely is analyzed2) an

examination of client subcategories provides even betterinformation. We use two basic categorizations, onedifferentiating between domestic and foreign clients and

the other between corporate and financials providing uswith the four sub-categories:

1. Foreign financial institutions2. Foreign corprorates3. Domestic financial institutions4. Domestic corporates

1 See among others Lyons R, The Microstructure Approach to Exchange

Rates, The MIT Press, 2006.2 The Commitment of t raders report consists of three reported

categories for each currency: (1) Commercial accounts, (2) Non-commercial (i.e. speculative) and (3) Small accounts. However, in FX awidely used praxis is to follow only the non-commercial flows.

37



Currency Strategy

Contacts

STOCKHOLM

Carl Hammer (editor)

+46 8 506 231 28

[email protected]

Richard Falkenhäll

+46 8 506 231 33

[email protected]

Dag Müller

+46 8 506 231 29

[email protected]

Mats Olausson

+46 8 506 232 62

[email protected]

Karl Steiner

+46 8 506 231 04

[email protected]

Anders Söderberg+46 8 506 230 21

[email protected]

FRANKFURTThomas Köbel

+49 69 97 27 12 45

[email protected]

OSLO

Erica Blomgren

+47 22 82 72 77

[email protected]

SINGAPORESean Yokota

+65 6505 0500

[email protected]

38



Currency Strategy

Disclaimer

Analyst CertificationWe, the authors of this report, hereby certify that the views expressed in this report accurately reflect our personal views. In

addition, we confirm that we have not been, nor are or will be, receiving direct or indirect compensation in exchange for

expressing any of the views or the specific recommendation contained in the report.

This statement affects your rights

This research report has been prepared and issued by SEB Research a unit within Skandinaviska Enskilda Banken AB (publ)

(“SEB”) to provide background information only. It is confidential to the recipient, any dissemination, distribution, copying, or

other use of this communication is strictly prohibited.

Good faith & limitationsOpinions, projections and estimates contained in this report represent the author’s present opinion and are subject to change

without notice. Although information contained in this report has been compiled in good faith from sources believed to bereliable, no representation or warranty, expressed or implied, is made with respect to its correctness, completeness or accuracy

of the contents, and the information is not to be relied upon as authoritative. To the extent permitted by law, SEB accepts no

liability whatsoever for any direct or consequential loss arising from use of this document or its contents.

Disclosures

The analysis and valuations, projections and forecasts contained in this report are based on a number of assumptions and

estimates and are subject to contingencies and uncertainties; different assumptions could result in materially different results.

The inclusion of any such valuations, projections and forecasts in this report should not be regarded as a representation or

warranty by or on behalf of the SEB Group or any person or entity within the SEB Group that such valuations, projections and

forecasts or their underlying assumptions and estimates will be met or realized. Past performance is not a reliable indicator of

future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or

related investment mentioned in this report. Anyone considering taking actions based upon the content of this document is

urged to base investment decisions upon such investigations as they deem necessary. This document does not constitute an

offer or an invitation to make an offer, or solicitation of, any offer to subscribe for any securities or other financial instruments.

Conflicts of Interest

SEB has in place a Conflicts of Interest Policy designed, amongst other things, to promote the independence and objectivity of

reports produced by SEB Research department, which is separated from the rest of SEB business areas by information barriers;

as such, research reports are independent and based solely on publicly available information. Your attention is drawn to the fact

that SEB, its affiliates or employees may, to the extent permitted by law, have positions in, buy/sell in any capacity, or otherwise

participate in, any financial instrument referred to herein or related securities/futures/options or may from time to time perform

or seek to perform investment banking or other services to the companies mentioned herein.

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In the UK, this report is directed at and is for distribution only to professional clients or eligible counterparties. In the US, this

report is distributed solely to persons who qualify as major institutional investors. Any U.S. persons wishing to effect

transactions in any security discussed herein should do so by contacting SEB Securities Inc (‘SEBSI’). The distribution of this

document may be restricted in certain jurisdictions by law, and persons into whose possession this document comes should

inform themselves about, and observe, any such restrictions.

The SEB Group: members, memberships and regulators

Skandinaviska Enskilda Banken AB (publ) is incorporated in Sweden, as a Limited Liability Company. It is regulated by

Finansinspektionen, and by the local financial regulators in each of the jurisdictions in which it has branches or subsidiaries,

including in the UK, by the Prudential Regulation Authority and Financial Conduct Authority (details about the extent of our

regulation is available on request); Denmark by Finanstilsynet; Finland by Finanssivalvonta; Norway by Finanstilsynet and

Germany by Bundesanstalt für Finanzdienstleistungsaufsicht. In the US, SEBSI is a U.S. broker-dealer, registered with the

Financial Industry Regulatory Authority (FINRA). SEBSI is a direct subsidiary of SEB.

39



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To find out how you can develop your electronic trading, visit us at www.seb.se/mb.

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currency strategy: scandie parity as the usd climbs higher

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