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Get used to Scandinavian parity WEDNESDAY

9 SEPTEMBER 2015

Global markets were caught off guard as China devalued its currency on 11 Aug. The move was seen as raising downside risks to Chinese growth with widespread knock-on effects for the global economy. But risk appetite probably collapsed due to other factors as well such as crowded positioning, new regulations curbing liquidity and “computerized” trading. Although we expect weak risk appetite near-term we believe markets have overreacted as we have constructive views on US, EMU and even Chinese growth. FX markets will needless have to pay more attention to growth prospects going forward and not only central banks. Recent risk averse market behavior showed various unusual characteristics, with the USD falling back while the SEK surged; in our view such moves reflected speculative market positioning and are therefore no more than short-term phenomena. Reasonably reassuring growth data/ leading indicators later this year will reestablish “old” FX trading patterns and trends. Countries/ currencies heavily dependent on commodity exports to EM/China, whose central banks have scope to cut interest rates further and whose currencies are still overvalued will depreciate further (including the AUD and NZD). Regarding the previously bullish USD outlook, prospects have admittedly deteriorated somewhat as: 1) Fed will only very cautiously hike rates and; 2) Asian/EM central banks continue to sell US treasuries with potentially negative implications for the USD. The euro flow outlook has improved but as the ECB is close to easing monetary policy even further, we expect EUR/USD rallies to fade before 1.15. A number of political elections/events also continue to add a risk premia on the common currency. Our FX Scorecard ranking remains (very) SEK-positive, with only the Riksbank resisting the currency’s continued trade-weighted appreciation. Finally, the NOK outlook remains fragile: while the currency is attractively priced we expect it to remain weak. We project NOK/SEK below parity H2 2015.

EDITOR

Carl Hammer + 46 8 506 231 28

BUY THE CS BASKET We recommend buying USD (33%),

SEK (32%), GBP (25%), JPY (10%) vs selling EUR (-6%), CAD

(-6%), CHF (-16%), NOK (-19%), AUD (-22%), NZD (-31%).

SELL EUR/USD ON RALLIES We rank Fed as a less positive

USD-factor now. However the increasing risk of ECB

expanding QE-purchases will weigh on EUR H2 2015.

SELL NZD/CAD CAD has weakened beyond our previously

bearish forecasts as the economy entered recession in H1

2015 and the currency is now slightly undervalued according

to our models. RBNZ continues to ease monetary policy and

the kiwi remains overvalued.

SELL NOK/SEK Despite trading near multi-year lows we

think the Nordic commodity currency is vulnerable in the

context of low oil prices/weakening growth. Both currencies

are now undervalued but Swedish growth at 3% 2015/16 will

contribute to NOK/SEK trading below parity H2 2015.

TECH: BUY USD/SEK Bullish wave pattern (triangle)

supports continued upside targeting 9.33. Stronger USD view

should be reconsidered below 8.03.

QUANT

Currency Strategy

Forecasts and FX Scorecard FX forecasts

08-Sep Q3 15 Q4 15 Q1 16 Q4 15 Q1 16 Forecasts 2

EUR/USD 1.12 1.10 1.08 1.04 1.07 1.06 The big picture 5

EUR/JPY 134 132 133 130 134 134 USD 10

EUR/GBP 0.73 0.72 0.70 0.69 0.69 0.68 EUR 12

EUR/CHF 1.09 1.09 1.09 1.10 1.08 1.08 JPY 14

EUR/SEK 9.42 9.40 9.20 9.00 9.35 9.30 GBP 16

EUR/NOK 9.23 9.25 9.40 9.35 9.00 8.90 CAD 18

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 AUD 20

USD/RUB 68.4 69.0 70.0 71.0 67.0 66.0 NZD 22

Cross rates CHF 24

USD/JPY 120 120 123 125 125 126 SEK 26

GBP/USD 1.54 1.53 1.54 1.51 1.54 1.55 NOK 28

USD/CAD 1.32 1.34 1.36 1.40 1.33 1.33 DKK 30

USD/CHF 0.98 0.99 1.01 1.06 1.01 1.02 RUB 32

AUD/USD 0.70 0.71 0.66 0.64 0.70 0.70 CNY 34

NZD/USD 0.63 0.63 0.59 0.56 0.63 0.63 Internal scandie flows 36

USD/SEK 8.44 8.55 8.52 8.65 8.74 8.77 Contacts 37

GBP/SEK 12.97 13.07 13.12 13.07 13.46 13.60 Disclaimer 38

JPY/SEK 7.04 7.12 6.93 6.92 6.99 6.96

CHF/SEK 8.63 8.62 8.44 8.18 8.66 8.61

NOK/SEK 1.02 1.02 0.98 0.96 1.04 1.04

USD/NOK 8.27 8.41 8.70 8.99 8.41 8.40

USD/CNY 6.37 6.50 6.60 6.60 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

Fundamentals 25.0% +2 +1 +1 +2 -1 0 +1 0 +2 -2

Carry 0.0% 0 0 -1 0 0 +1 -2 0 -1 0

Mon. policy 17.5% +2 -2 -2 +1 0 -1 -1 0 -3 0

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

Valuation 15.0% -2 +1 +3 -1 +2 0 -2 -4 +2 +3

Positioning 7.5% -1 0 +1 0 0 0 0 -1 +2 0

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

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

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

Event risk 0.0% 0 -2 0 0 0 0 0 0 0 0

Risk appetite 5.0% -2 +2 +3 -2 0 -2 -1 0 0 -2

Total weighted score +0.7 -0.1 +0.2 +0.5 -0.1 -0.4 -0.6 -0.3 +0.6 -0.3

G10 FX Scorecard - Contributions to total score

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

SEK Weighted score: 0.6

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

NOK Weighted score: -0.3

2

Currency Strategy

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

USD Weighted score: 0.7

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

JPY Weighted score: 0.2

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

CAD Weighted score: -0.1

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

AUD Weighted score: -0.4

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

EUR Weighted score: -0.1

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

GBP Weighted score: 0.5

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

CHF Weighted score: -0.3

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

NZD Weighted score: -0.6

3

Currency Strategy

4

Currency Strategy

China devalues making growth more decisive for FX markets now

For some time now we have expressed our support for a

long USD position based on superior US growth, the

anticipation tighter Fed monetary policy and (previously)

a weak dollar. The flipside of a stronger USD is of course

a falling euro, with euro-zone developments over the

past 12-24 months causing the EUR to depreciate against

the USD. However since Q2 this year, the USD has failed

to outperform other G4 currencies. Instead, it has

continued to strengthen against commodity currencies,

and indeed almost all its emerging market counterparts.

The narrow trade-weighted USD has remained range-

bound while the broad-based USD has appreciated

further.

In identifying FX market drivers, we have always regarded central bank policies as a key factor. Certainly, they continue to have a major impact on

currency performance. However, more recently central

banks have begun to react to the performance of their

respective currencies, creating a feed-back loop between

their own monetary policy stance and FX. This is hardly

surprising as global disinflationary developments mean a

weak currency is an easy way to achieve individual

inflation targets. Consequently, the present currency war

is less about traditional beggar-thy-neighbour policies

(including competitive devaluations) and more about

using the external channel to import inflation through a

weaker exchange rate.

Over the summer, aggressive central bank action appears

to have played a less important role in predicting FX

movements. Instead, our various scorecard components show valuation has been the best common denominator of FX performance. Exampling

a few currencies helps explain developments. In

particular, commodity currencies (especially NZD and

AUD) have fallen back with our valuation models for both

(kiwi in particular) still regarding them as expensive. The

CHF has also fallen from an extreme to less extreme

overvaluation. Meanwhile, the EUR and SEK have both

performed well but remain undervalued (especially the

SEK).

Several observers have described the trading pattern

(particularly since the recent Chinese devaluation, see

further below) as connected with the current account

status: while some surplus countries have appreciated

(EUR, SEK, JPY, CHF) deficit countries have given ground

(USD, GBP and commodity currencies). Although an

interesting thesis we have failed to find strong evidence

this is the case. We therefore still regard the current account as less important for G10 countries. EM

markets are different. Clearly, several less attractively

valued current account deficit countries (including

Turkey) have fallen back and remain vulnerable.

However, the current trend whereby overvalued currencies weaken has also highlighted another theme that China has become responsible for making more important: growth.

CHINESE DEVALUTION PROVIDES A GROWTH SHOCK

TO MARKETS

Seen in retrospect the PBOC’s move on 11 Aug was

perhaps not that surprising after all. In its article IV review

of China published at the end of July, the IMF concluded

that the Chinese renminbi was no longer overvalued,

noting the “staff assessment that the substantial

appreciation of the renminbi in REER terms this year has

brought the exchange rate to a level that is no longer

overvalued” (5.2% CAGR appreciation since 2005).

Maintaining the USD peg intact caused the yuan to

outperform all other EM currencies which are/were falling

rapidly vs. the USD.

Apart from deteriorating competitiveness many other explanations have been raised as reasons for the devaluation: 1) China looks to counteract Fed rate hikes and a stronger USD – we regard this

explanation as improbable as markets have been

discounting the stronger USD theme for a year now; and

2) Such a move has been regarded as pre-empting the IMF decision in November on whether or not to include the yuan in the SDR basket. Once again, this is

not particularly reasonable as the IMF decision on SDR is

5

FX Ringside

not based on its exchange rate level but rather on

whether China is a major exporter and whether the

currency is freely usable. China is a major factor in global

trade and although the currency is not fully convertible it

is definitely used globally as a means of payment.

At the same time (and more importantly than either the

Fed’s behaviour or the SDR question), despite the

country’s still extremely large current account surplus,

China’s FX reserves have begun to fall as capital leaves

mainland China. During the past two years, FX reserves

have decreased by USD 400bn. Partly this may reflect the

valuation effect as the USD (and CNY) appreciates,

although most comes from outflows. Some outflows may

also result from the transfer of funds from the central

bank’s balance sheet to strengthen the capital base of

various policy banks and newly established international

lenders programmes including the Asian Development

Bank (which have received up to USD 100bn).

Capital outflows are large enough to have significantly

impacted FX reserves, causing the flow outlook for the

renminbi to have switched to negative from positive. As a managed float it is difficult to understand the policy choice made by the PBOC to intervene in the currency over a prolonged period to ensure its continued stability vs. an appreciating USD only to devalue it suddenly in three stages. In this regard, markets have made a clear interpretation: the issue is not about Fed policy or SDR inclusion but instead growth (and worries China is growing much slower than expected). We have raised our USD/CNY forecasts to 6.60 and 6.70 end-2015 and end-2016 respectively.

China’s currency devaluation revealed some unusual

correlations with the USD depreciating substantially as

risk was sold-off. However, this trading pattern was

instead a consequence of a speculative position build-up

in long USD positions, and at least partly, the behaviour

of reserve managers. The collapse in risk appetite and

surge in volatility forced repatriation and unwinding of

positions causing crowded long risk and long USD trades

to become vulnerable. We do not expect the USD to be (that) positively correlated to risk appetite on a more lasting note.

Currency policies in the context of falling commodity

prices and weaker global growth have made the USD

more vulnerable. While official data is lagging, some reports for August suggests selling of US treasuries by various reserve manager accounts to support their own currencies. This highlights the dilemma facing the USD as still the largest component of global reserves.

FED HIKING BUT CYCLE NOT THAT USD POSITIVE

(BUT ECB POLICY STILL IS)

SEB still expects the Fed to hike rates at its upcoming

September meeting. Although the call is close we believe

the domestic economy is sufficiently strong to raise rates

above zero, with unemployment at 5.1% and tentative

signs apparent of rising wage pressure (according to the

Beige Book this situation is currently more broad-based).

The US is also a relatively closed economy and the Fed is

unlikely to react (yet) either to equity market falls or

ongoing volatility unless the situation becomes more

serious (i.e. if developments threaten growth). Inflation is

still well short of its target (PCE core at 1.2% y/y), while

lately broad-based inflation expectations have fallen. The

trade-weighted USD is now also slightly overvalued.

However, talk of a policy error to raise rates by 25bps to

0.25-0.50% is farfetched in our opinion. US financial

conditions remain relatively loose and are expected to

remain so. The Fed is fully aware of the ways in which

financial market (herd) behaviour can amplify policy

movements (through changes in interest rates and

currencies). We therefore expect the rate decision in September will be accompanied by a very carefully worded dovish statement intended to calm markets. In other words, Fed policy will only be USD positive in the short-term, and more neutral as the central

6

FX Ringside

bank at most delivers what markets already discount.

Regardless of whether or not the Fed hikes, monetary

policy divergence remains a relative theme, since the ECB

is close to increasing/broadening the rate of asset

purchases. Inflation will continue to undershoot the ECB

target. Euro flows have stabilised, while the current

account provides support approaching 3%/GDP.

However, reserve managers continue to divest out of

European denominated fixed income holdings. Despite

the “solution” of the Greek situation, political risks clearly

remain. The euro is also not cheap (our index, page 11

shows it trading close to neutral level). With falling

commodity prices, this highlights the risks for the ECB.

Risk aversion may well bring EUR/USD back to 1.15 as long USD positions unwind further. But the Fed

rate hike on sept 17th

EUR/USD is a short-term USD

positive.

70

75

80

85

90

95

100

105

110

115

120

2001 2003 2005 2007 2009 2011 2013 2015

SEBEER Long-term fair value, EUR Index

EUR Long-term Fair value

CHANGES IN RISK APPETITE INFLUENCE CURRENCIES

AGAIN. In mid-2012 we observed how the previously

strong correlation between market risk appetite and

currencies had broken down almost completely.

Subsequently, currencies have basically been unaffected

by fluctuations in risk appetite. However, more recently we

have seen how they have again reacted because of

variations in risk appetite, although relationships have

changed for some currencies. For example, the

traditionally negative correlation between the USD and

risk appetite has altered its sign completely, with the

dollar currently tending to weaken with lower risk

appetite, causing it to behave much as commodity

currencies like the AUD and NZD have usually behaved. As

well as the USD, a normally uncorrelated currency like the

GBP has also begun to trade positively with increased risk

appetite. By contrast, the JPY and EUR have both shown

negative correlations with risk appetite and tend to benefit

from set-backs in risk appetite.

We see two factors explaining why the correlation

between risk appetite and currencies has resumed. Firstly,

for over a year, currencies have reacted strongly to

expectations regarding monetary policy. For example, the

dollar has strengthened due to expectations of divergent

monetary policy between the ECB and Fed. With markets

more stressed, it is fairly natural that reduced tightening

expectations are negative for the dollar. Moreover this

force will be even more powerful regarding market

positioning, with the speculative community being net

long the dollar.

As correlations between exchange rates and general risk

appetite have returned it once again becomes increasingly

important to have an opinion on the outlook for market

risk sentiment going forward.

NOKSEK: A SUSTAINED BREAK BELOW PARITY

Macro accounts continue to be surprised by downward

pressure on the scandi cross, which for a long time has

been favoured topside based on petroleum wealth in

Norway vs. Sweden’s traditional manufacturing industry

base, which is geared towards a weak Europe. However,

the trend remains negative as terms of trade

developments and the relative growth outlook favour the

SEK over the NOK, despite the Riksbank’s highly

expansive monetary policy. It is too early to conclude that

Norwegian growth has bottomed based on falling oil

prices, as leading indicators continue to signal a bleak(er)

outlook. In nominal terms, NOK is weak with several real

effective exchange rate series pointing in the same

direction. For valuation to start to kick-in oil prices must

stabilise and Norges Bank must also refrain from cutting

rates. It is too early to dismiss such risks. Regarding the

SEK, we still expect the trade-weighted krona to bottom

out. Based on our FX Scorecard most factors continue to suggest a positive outlook. Should global growth deteriorate or Swedish inflation disappoint during the fall (the most likely negative SEK factor), our high SEK ranking would prove too optimistic. Nevertheless, we expect NOK/SEK to trade

below parity during the fall/winter.

7

FX Ringside

FX SCORECARD PERFORMANCE SINCE MAY. For

almost two years we have favoured being long the USD

although our scorecard approach has also suggested

long euro exposures a few times. Our core views of a

stronger dollar and weak euro have been important

contributors to our portfolio return since May 2014.

The last scorecard update was in May 2015. Once again

the USD was one of the best performers, this time in a

split lead with the GBP. Other currencies supposed to

outperform according to our framework include the SEK,

NOK and CAD. Underperformers included various

currencies affected by monetary policy easing (EUR, JPY)

and commodity currencies (AUD, NZD).

Since 27 May, when it was last rebalanced, the scorecard

basket has generated a return of 0.4% (27 May) including

carry. Between 5 Aug and 28 Aug, the Scorecard portfolio

index lost 1.6%. This reflected decreased global risk

appetite following China’s devaluation of the CNY, and

also the fall in equities which weakened the USD and GBP

while strengthening the EUR and JPY.

If the positive performance of the FX Scorecard index at

the beginning of the year was broad-based, it has been

the complete opposite since the portfolio was rebalanced

in late May. Most positive performance since May has

been attributable to the weak AUD, which generated a

positive return of 1.75%. Moreover, depreciation of the

NZD and CHF had a positive impact on performance.

Negative performance basically concerned the EUR, NOK

and CAD. NOK and CAD, both commodity currencies,

depreciated further due to the lower oil price and

monetary policy easing, while the euro has continued to

recover against most currencies since the large sell-off in

Q1.

THE UPDATED FX SCORECARD In the FX Scorecard we

take into account the relative importance of various

categories by the weight we attach to each category to

best reflect our expectations. For a long time monetary

policy has been the key factor for exchange rates. We still

believe relative monetary policy and the outlook for

growth will remain important factors for the currency

market over the next 3-6 months, although they will not

be the most important. We have therefore lowered the

weight for monetary policy expectations in the scorecard

to 17.5% (25%). We do so because monetary policy has

reached its outer bound (ECB, BOJ, Riksbank) and

because further policy easing by any of these institutions

is unlikely to have any material impact on currencies

going forward. Instead we have increased the importance

of “Fundamentals” to 25% (15%), particularly the

outlook for growth and (to a lesser extent) the terms-of-

trade situation.

Moreover the weight attached to the Economic surprise

index reflecting potential surprises in data remains at

10% as in May, further underlining the importance for

currencies of support from a strong growth outlook. With

valuation being an important driver for currencies in

recent months according to our evaluation, we have

increased its weight in the scorecard to 15% (10%)

making it a key driver. Compared to May, we have also

changed drivers as the correlation between exchange

rates and risk appetite has resumed. We have therefore

raised the weight related to risk appetite to 5% (0%) in

order to capture its increased importance for the

currency market.

One might probably argue that a 5% risk appetite

weighting is too low considering that periodically it has

been almost the only currency driver. We have kept it

reasonably low as we still expect fairly strong growth in

both the US and euro area in H2 2015 and 2016, which

should eventually be positive for risk appetite. Current

uncertainty regarding global growth and particularly the

situation in China has increased in recent weeks and it is

difficult to say for how long it will continue. In addition, a

potential lift-off by the Fed at one of its upcoming

meetings could increase uncertainty and market volatility

and hurt risk appetite further. In other words, there will

probably be further periods of temporarily increased

stress when lower risk appetite becomes the main driver

for currencies followed by rebounds.

Given its high score the USD receives 33% weight in our

new Scorecard portfolio followed by the SEK (32%) and

GBP (25%). The strategy also recommends long

8

FX Ringside

positions for the JPY 10%. Currencies with the largest

short exposures include the NZD (31%), AUD (22%) and

NOK (19%).

The following portfolio represents the FX Scorecard Currency Strategy update:

9

Currency Strategy

US dollar The outlook for the dollar very much depends on the

actions of the Fed. However, the recovery has been weaker

than expected so far this year. Any signs that the economy

is picking up would make it easier for the Fed to raise rates

in September, a key factor for our positive dollar outlook. A

different scenario where the bank postpones tightening would produce a very different dollar scenario.

ECONOMIC FUNDAMENTALS Despite a recovery in Q2

(3.7% q/q ar) driven by a recovery in household spending

(weak in Q1), US growth was only satisfactory during the

first half of 2015. While the lower oil price is widely assumed

to be net positive for the US economy by benefiting

consumers, the initial effect of the price slump was negative

as it slowed investments in the oil sector. Moreover the

USD’s rapid appreciation in Q1 probably hurt the export

sector. Despite mixed growth-related data over the

summer, overall it signals that economic expansion will

pick-up in H2. Business sentiment within the manufacturing

sector, which fell before the summer, has stabilized at just

over 50, while service sector sentiment scored 60.3 in July

(eased a tad to 59 in August) - levels not seen since

2005/2006. Consumer sentiment has also improved, which

should benefit household spending going forward.

Positively, the housing market continues to improve as

demand for homes picks up. Indeed it should result in rising

house prices and acceleration in housing construction. The

labour market has also provided good news, with

employment continuing to increase each month by around

240,000 and unemployment set to decline further, soon

falling below 5% where wage growth can be expected to

accelerate. �� +2

MONETARY POLICY Since last year, the case for a stronger

dollar has been based on expectations that US monetary

policy and that of the rest of the world, particularly the euro

area, would diverge. We still expect the Fed to start

tightening policy, with a first rate hike this month. However,

low inflation due to further downside pressure from falling

fuel prices and slow wage growth will slow the Fed’s

tightening of monetary policy. Now we expect only one rate

hike this year followed by a cautious approach to 2016 also,

with the Fed fund target rate reaching 1.25% by the end of

2016. Although monetary policy remains positive for the

dollar, it will be less supportive than we expected over the

next six months. �� +2

FLOWS With US growth stronger than in other countries,

the country’s imports are rising rapidly, hurting its trade

balance. In Q1 the current account deficit widened to 2.6%

of GDP after improving continuously since 2011. Most likely

the trade deficit will continue to widen going forward as we

expect US domestic demand to remain the key driver for

growth. Portfolio-related capital flows such as foreign

purchases of US long-term securities are USD-positive. In

addition we expect that the Fed begins to tighten its

monetary policy later this year. Higher US interest rates

would probably attract foreign capital. Overall, flows are

neutral to slightly positive for the dollar. �� 0

EUR speculative positions

04 05 06 07

Con

trac

ts (

thou

sand

s)

-25

0

25

50

75

100

125

1.150

1.200

1.250

1.300

1.350

Speculative positions

USD/CADUSD/CADEUR/USD

The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Risk appetite

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Mon. policy

Carry

Fundamentals

USD Weighted score: 0.7

10

Currency Strategy

US dollar VALUATION Our internal long-term fair value model,

SEBEER, indicates the USD trade weighted index probably

has been undervalued since 2003. It appears the general

dollar depreciation coincided with the introduction of the

euro in 2002 and its reputation as an alternative global

reserve currency. However, superior US growth and

expectations of widening rate differentials have triggered

a recovery for the USD since May 2014. Our internal

valuation model as well as the real effective exchange

rate, indicate the USD now trades on the rich side of its

long-term fair value. However, it is still far from stretched

territory where valuation would become a drag on the

USD. �� -2

POSITIONING Speculative accounts are long USD and

have so been since May 2014. However, in the beginning

of 2015, speculators scaled down their record long USD

position, but as the oil price resumed falling and the US

economy seemed to come out of the Q1 slump this

summer, they began to add to their net long USD position

once more. This however came to a swift halt mid-August

and the past two weekly reports on positioning have

shown that specs have sharply scaled down their net long

position again. It is this negative USD sentiment that

provides the current modest negative positioning score.

�� -1

TECHNICALS A correctional three-wave structure seems

to have been completed, confirming strong support in the

yearly moving average band (93.50/91.70). A bullish

short-term print was added last month, but extension

over 98.30 is needed for full confirmation and re-entry

into the backdrop uptrend with a long-term Fibo target

looming at 103.30 once 100.20 is taken out. �� +3

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE With its

superior liquidity the USD has traditionally been seen as a

typical safe haven currency which is negatively correlated

with risk appetite. However since 2012 these

relationships between currencies and risk appetite have

disappeared and that goes for the USD as well. More

recently it has actually been the other way around and

currently the USD seems to be hurt against funding

currencies like the EUR and the JPY when financial

markets come under increased stress. Another reason is

probably that the outlook for the USD is closely related to

monetary policy and the timing and pace of coming rate

hikes by the Fed, which probably enforces the positive

relationship between the dollar and risk appetite. Based

on the rate differential between the euro area and the US

there should be potential for some further appreciation of

the USD.


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2001 2003 2005 2007 2009 2011 2013 2015

SEBEER Long-term fair value, USD Index

USD Long-term Fair value

Technical view: USD INDEX

11

Currency Strategy

The euro The euro performs reasonably well at the moment.

Neither the Greek crisis nor the increased likelihood of

Fed rate hikes have been sufficient to put downward

pressure on the currency. In addition, verbal interventions

fell silent in past weeks, indicating that law makers and

central bankers see no need for an even weaker currency.

Looking ahead however, it is increasingly likely that ECB

has to increase its efforts if economic developments

should disappoint. Risks to the currency are still skewed to the downside.

ECONOMIC FUNDAMENTALS The economy grew by 0.3

percent in q2 2015 after 0.4 percent in q1. The recovery

has failed to gather additional momentum and remains

uneven across the monetary union. While Spain, Ireland

and Germany are doing well, the heavyweights France

and Italy are lagging behind. Unemployment fell to 10.9%

in July but remained unacceptably high. In the second

half of 2015, the very accommodative monetary

conditions as well as the tailwinds from lower commodity

prices and the depreciation of the euro should lead to a

gradual strengthening of the recovery. We expect the

economy to expand by 1.6 per cent and 2.1 per cent in

2015 and 2016 resp. While the overall budget deficit will

continue falling 2015 and 2016, consolidation needs in

several member states continue to be high thus setting

narrow limits to any fiscal stimulus. �� +1

MONETARY POLICY After having deployed most of its

available instruments the ECB wants to keep a steady

hand in coming months. The expansionary monetary

policy is slowly finding its way into the real economy,

resulting in very favourable financing conditions for

private households and firms. At various occasions the

Governing Council has stressed that all non-standardized

measures will be fully implemented. Therefore, asset

purchases will run until at least September 2016, or

longer if necessary. At the September meeting, updated

ECB staff macroeconomic projections showed a slowly

strengthening economic recovery. Due to the latest

decline in commodity prices inflation projections was cut

indicating that it will take until 2018 before the HICP rate

will be close to the ECB’s target of close, but below, 2%.

The ECB’s monetary policy will remain very loose/looser

for a long time to go and clearly euro negative. ��-2

FLOWS In the period ending in June 2015 the 12-month

cumulated current account surplus rose to €265.5bn or

2.6% of GDP, compared with a surplus of €177bn for the

twelve months to June 2014. The surplus in the current

account has been matched by similar sized outflows.

Combined direct and portfolio investments of euro area

based investors reached €807bn, surpassing those

investments of foreigners in the euro area by €271bn.

Looking ahead, no change in trend is visible in the current

account. Therefore, it looks increasingly likely that the

surplus will rise close to 3% of GDP until the end of 2015,

indicating that the euro is already undervalued at current

levels. ��-1


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EUR Weighted score: -0.1

12

Currency Strategy

The euro VALUATION. Until the euro started to depreciate a year

ago it was overvalued in trade weighted terms according

to the SEBEER long-term fair value model. The

depreciation following further easing by ECB and a

generally stronger dollar has brought it very close to the

estimated long-term fair value. Other measures of

valuation as the real effective exchange rate for the euro

suggest a similar situation, with the euro being quite

close to its historical average and if anything slightly

undervalued. �� +1

POSITIONING Speculators are net short EUR vs. USD but

to a far less extent than what has been customary over

the past year. The record short position, from end of Mar

2015, has been significantly scaled down, probably as the

threat to the EUR from the Greek crisis abated. The

current positioning score is neutral and is reflecting that

short positioning no longer is an excess and that

downscaling it (showing positive EUR sentiment) has

been too slow to generate a positive score. �� 0

TECHNICALS Dynamic resistance at the yearly moving average band seems to hold and the move up from the

94.00 low looks medium-term correctional. Loss of

support at a 95.40 "B-wave low" is however needed for

full confirmation and a “promise” of fresh lows (>94.00)

in the making. �� -3

LIQUIDITY, EVENT RISKS, GLOBAL CYCLE. Due to the

third bailout package, Greece is of no interest anymore at

the markets at the moment. The ECB bond purchases will

continue at a monthly clip of €60bn at least until

September 2016, and longer if necessary. No early

tapering of these purchases looks likely at the moment.

Focus will be back on economic fundamental data.

Downside risks have increased due to slower growth in

many emerging markets. In autumn, general elections will

take place in Portugal and Spain which could lead to

changes in government and to a strengthening of anti-

euro forces.


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85

90

95

100

105

110

115

120

2001 2003 2005 2007 2009 2011 2013 2015

SEBEER Long-term fair value, EUR Index

EUR Long-term Fair value

Technical view: ECB EUR index

13

Currency Strategy

Japanese yen The JPY continues to be stuck around 120. We expect JPY

weakness to continue vs USD towards 130 but we would

need to see another round of QE by Bank of Japan or a

Fed rate hike to break out of current range. SEB’s view is

for the US to start hiking in 2015 and for the BoJ to launch

another round of QE in the October policy meeting. The

economy remains too weak to increase inflation and BoJ

will have to act. A Fed and/or BoJ event will act as a

catalyst to break 125 and reach 130.

ECONOMIC FUNDAMENTALS The economy is gaining

momentum after registering a recession from VAT tax

hike in April 2014. Prime Minister Abe has also passed a

stimulus package worth 0.7% of GDP and cut the

corporate tax rate by 2.5 percentage points to 32.11%

from April 2015. The administration plans to continue

lowering the tax rate over about five years to below 30%.

Consumption has also picked up post VAT hike. Japan’s

growth should rebound to 0.8% in 2015 from -0.1% in

2014. Also, Abenomics is starting to gain traction where

corporates are starting to deploy the cash by investing in

capex and hiking wages. However, the key issue is that

growth is too slow for inflation pressures to rise and hit

BoJ’s 2% target. �� +1

MONETARY POLICY BoJ is facing difficulties in reaching

the “2% inflation in 2 years” promise and have pushed it

back to 2% by FY2016. Even with the delay, we feel that

the target will be difficult to meet with current inflation

rate at 0% and lower oil prices. Japan will also be heavily

influenced by China exporting deflation with a weaker

RMB. To hit the 2% target, we think BoJ will announce

another round of Quantitative Easing (QE) towards

October where they will likely quadruple the size of the

monetary base. And similar to the last 2 QEs, we will not

get any warning from the BoJ about another stimulus.

October is the likely timeframe since it will see that

inflation expectations released on the Oct 2 Tankan

survey will show a fall, following headline inflation. �� -2

FLOWS. Capital flows: equity has finally turned outwards

to support Yen weakness. We’ll likely see debt and

speculative flows turn out also as soon as we get more

clarity from the Fed. However, going forward now the

current account is returning to a surplus from lower oil

prices. Restart of nuclear power plants will also slow

imports of coal further. It is too early but if we get current

account surplus and Japan reaching the 2% inflation

target (meaning monetary loosening ends) the Yen

weakness will become capped.�� -1


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JPY Weighted score: 0.2

-7-6-5-4-3-2

-10

123

45

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Real GDP % y/y Forecast

-40

-30

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0

10

20

30

40

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-2

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0

1

2

3

4

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ex VAT CPI ex fresh food

Import Price %yoy (RHS)

% yoy BoJ Forecast

-6

-4

-2

0

2

4

6

11 12 13 14 15

Japan BOP 12 month rollin sum as % of GDP

Current Account FDIEquity Inv Debt InvOther Inv

14

Currency Strategy

Japanese yen VALUATION The rapid depreciation since Q4 2012 has

moved JPY valuation into a stretch on the downside.

From previously being extremely overvalued prior to the

correction our own SEBEER model now place the JPY

among the cheapest G10 currencies. Similarly the long-

term real effective exchange rate is currently far below

the historical average (more than 1.5 standard

deviations). Altogether it is difficult to come to any other

conclusion than the yen currently is undervalued and

likely to move higher if the weak economy improves and

the BOJ indicates they will end bond purchases. �� +4

POSITIONING Speculative accounts are net short JPY vs. USD as they have been since Oct 2012. Between January

and May 2015 the short position was almost erased only

to quickly be build up again. Since then positioning has

been choppy and currently a quite large net short

position is rapidly being downscaled which renders the

positive positioning score for JPY. �� +1

TECHNICALS Even if it is “just a correction” higher, it has more fuel to burn short- medium-term and 129.60\80

would become exposed if when nearby resistance at

127.40\128.20 is taken out. To think less of the yen again,

support at 122.40 must be given up again. �� 0

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE There

are several risks to Japan in this category. On liquidity,

too much liquidity has made short term yields in Japan

turn negative and mass BoJ purchases of JGBs are

reducing activity. These conditions are fine in normal

markets but in times of shock, it leads to sudden

movements that can be negative for Japan. Also, short

Yen is still a consensus trade and along with long Nikkei.

The long Nikkei positions are mostly hedged by short Yen

position so in a risk off event, Yen will still strengthen.

The key event risk is Bank of Japan policy meeting. The

Tankan survey result in October is likely to be the trigger

and show lower inflationary expectations in line with

falling headline inflation. We see another round of QE by

BoJ in October.


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85

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105

115

125

135

145

2001 2003 2005 2007 2009 2011 2013 2015

SEBEER Long-term fair value, JPY Index

JPY Long-term Fair value

Technical view: BOE JPY index

15

Currency Strategy

British pound sterling We have been positive on the GBP for some time as the

economy has recovered strongly and the labour market

has improved. We still expect the BOE to be one of the

front runners when monetary policy tightening begins.

With the economy firmer, the GBP has appreciated to

stand currently probably slightly overvalued in trade

weighted terms. Still, we expect strong fundamentals and tighter monetary policy to continue to support the GBP.

ECONOMIC FUNDAMENTALS After disappointing in Q1,

growth accelerated in Q2. Since the recovery began in

2013, household spending has been the key driver for UK

growth and is likely to remain so going forward. So far,

rises in household income have been small so spending

increases have reduced household savings in recent

years. Household sentiment remains close to record high

levels supported by further improvements in the labour

market. Since 2012 unemployment has fallen from 8.5%

to 5.6% in May. As slack in the labour market has been

eroded wage growth has finally picked up this year but

from very low levels. In May earnings rose by almost 3%

y/y. Business sentiment is somewhat mixed with the PMI

for the manufacturing sector declining, while service

sector sentiment has stabilized at an expansionary level.

Regarding the historical relationship, sentiment

indicators suggest that annual GDP growth should

remain around 3% in coming quarters. SEB forecasts

growth of 2.7% in 2015 and 2.5% in 2016. �� +2

MONETARY POLICY The BOE has kept the Bank Rate

unchanged at 0.5% for several years. Like the rest of the

world, lower fuel prices combined with a stronger

currency have exerted significant downward pressure on

prices with headline inflation now close to 0%. However,

towards the end of the year we expect inflation to

increase as base effects from last year’s fall in fuel prices

fade. Still, inflation will remain muted and most likely

stay below the 2% target for several years. More recently

wage growth has accelerated as labour market

conditions have tightened. This could signal that

domestic cost pressure has begun to rise although it may

partly be offset by productivity improvements. One BOE

member voted to hike the Bank Rate by 25bps at the

August meeting, while several others regarded the

decision as finely balanced. Obviously low inflation is not

enough to restrain them, although any tightening will be

very gradual to allow the economy to adjust to rising

interest rates. We expect the first rate hike in Feb 2016, a

view not yet fully discounted in prices. �� +1

FLOWS The UK trade balance has improved slightly since

2013, although not enough to reduce the current account

balance, which posted a record deficit of almost 6% of

GDP in Q1. Much of the rise can be explained by the

income balance switching from surplus to deficit in

recent years. However, large portfolio inflows more than

fully offset the current account deficit. �� 0


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GBP Weighted score: 0.5

16

Currency Strategy

a

British pound sterling VALUATION The broad GBP appreciation since 2013 and

a weaker euro have moved the trade weighted GBP-index

well beyond the long-term fair value according to the

SEBEER-model. However, the stretch is by no means

extreme. Moreover the real effective exchange rate has

reached above the historical average confirming the

pound probably is slightly overvalued. Still valuation is

not exaggerated and therefore unlikely to trigger a move

in the GBP. �� -1

POSITIONING Speculators just switched from a net short

position (held since October 2014) into a small net long

position. Even if the trend supports GBP, it is not strong

enough to render a positive positioning score. On the

other hand most of 2014 specs held a quite large net long

GBP position, why the current net long is far from

excessive and thus no negative score is either applicable

for GBP at the moment. �� 0

TECHNICALS The pound fell out of bed last month while

bearishly breaking below a trend-ending “Wedge”. This

ups pressure on medium-term dynamic supports. The

21week exponentially weighted moving average band is

already broken and the yearly moving average band

(90.80/89.70 is also exposed with a target for the move

at 88.90. �� 0

EVENT RISK, LIQUIDITY AND GLOBAL CYCLE

Traditionally changes in the sterling exchange rate have

been almost uncorrelated with global risk sentiment.

However, in recent months there appear to be a small

positive correlation which indicates we should expect the

GBP to weaken on the back of lower risk appetite. The

outlook for the GBP is closely related to the outlook for

the UK economy and the probability for monetary policy

tightening by the BOE. However, low inflation has clearly

delayed any action from the BOE until 2016 at the

earliest. With domestic demand being the main driver for

growth the largest risk related to our cautious outlook for

the GBP probably is changes in expectations on BOE

policy, which could take the GBP in both directions from

where it trades today.


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2001 2003 2005 2007 2009 2011 2013 2015

SEBEER Long-term fair value, GBP Index

GBP Long-term Fair value

Technical view: BOE GBP index

17

Currency Strategy

Canadian dollar The Canadian central bank (BOC) has cut the rate twice

this year down to 0.5% after keeping it at 1.0% since

2010. The easing in financial conditions were attempted

to mitigate negative effects on the economy from the oil

price shock. Q2 GDP numbers released September 1

confirmed that Canada is in a mild recession. However,

we expect the economy to rebound already in Q3 as the

improving US economy should further improve Canadian

net exports and investments. We expect CAD to

outperform the other commodity currencies mainly due

to its extensive connections to the relatively strong US

economy.

ECONOMIC FUNDAMENTALS The Canadian economy

contracted in Q1 by 0.8% q/q AR and by 0.5% in Q2

which leaves Canada in technical recession. The

contraction is however mild compared to previous

recessions and the unemployment rate (6.8% in July

down from 7.0% a year ago) also indicates that there is

no broad-based slump in the economy. Already in Q3 the

recovery in the US, Canada’s main trading partner, is

expected to push the economy back into growth (BOC

expects GDP at 1.5% in Q3). GDP details, such as

increasing household spending and expansion by

industries other than in the resource sector, support such

expectations. Also the fact that GDP on a monthly basis

expanded for the first time in six months in June (0.5%)

points towards that the worst is behind. �� -1

MONETARY POLICY After keeping its policy rate at 1%

for over four years, BOC has cut rates twice this year

(January and July) to mitigate the adverse financial effects

on the economy from falling oil prices. The BOC is data

dependent and to maximise clarity, on May 19, Governor

Poloz stated the five factors most closely followed by the

bank: (1) oil prices, (2) CAD, (3) non-energy goods exports

(and tourism), (4) corporate investments, and (5)

employment. Both cuts have come after sharp falls in the

oil price hence that seems to be key in the reaction

function for BOC. Even though oil prices are lower than

what assumed by BOC in their July MPR (Brent oil to trade

at $65/barrel) a fall below the yearly low in March is

probably needed to trigger further rate cuts, especially

given that the economy seems to have turned for the

better along with BOC’s expectations. Currently, inflation

is not in focus for the bank; albeit close to the lower

confidence interval it is expected to rebound to the target

inflation rate of 2% in 2016. �� 0

FLOWS Weak competitiveness and poor US demand for

Canadian exports have caused deficits since early 2009.

With the oil price sharply lower a record high goods trade

deficit of 3.4bn was posted in May. On a positive note it

narrowed significantly already in June (to -0.8bn) and July

(-0.6bn) and exports grew with a promising 6.3%. In Q1

foreigners invested largely in Canadian securities while

Canadians sold foreign securities leading to the largest

quarterly inflow of funds since 2005, which offset the

negative current account. However in Q2 there has been

a small outflow of funds which in combination with the

trade deficit is negative for CAD. �� -1


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CAD Weighted score: -0.1

18

Currency Strategy

Canadian dollar VALUATION The Canadian dollar has traded at rich levels

for a long time, which indisputably has been negative for

the countries competitiveness. Two rate cuts by the BOC

and sharply lower oil prices, the currency has weakened

and currently trades below its long-term fair value in

trade weighted terms. The real effective exchange rate is,

however, close to the long-term average. As the currency

trades on the cheap side of its long-term fair value,

valuation has shifted from previously being a negative

factor for the CAD and today we would instead expect it

to strengthen in the longer term. �� +1

POSITIONING Speculative accounts are massively net

short CAD vs. USD. The position has been built during

summer when oil prices began falling again and BOC cut

rates a second time in 2015. At the same time the US

economy began to recover and markets increased the

probability of an autumn Fed hike. In mid-August specs

began correcting their excessive short position bringing it

from the 4th 3-year percentile to its 12

th and thus the most

pressing correction has already occurred why the

positioning score is neutral in the scorecard. �� 0

TECHNICALS All medium-term trend-identifiers point

boldly lower, but conditions in this timeframe perspective

are stretch (as can be seen through the low clustered

medium-term multi-stochastics and by the sheer distance

to a ½-year average. This calls for a short-term correction

higher to close back in on descending dynamic

resistance, now at 91.80\92.70. �� -2

EVENT RISK, LIQUIDITY AND GLOBAL CYCLE

Historically the Canadian dollar has correlated positively

with general risk appetite and the performance of the US

equity market. Lately however it is foremost the oil price

that dictates the development of CAD. RBA’s favoured

fair value model for AUD seems to work well also for the

CAD which isn’t very surprising as the both are

commodity related currencies. The fair-value is based on

terms of trade, relative real rate spread versus US, Europe

and Japan. Terms of trade and CAD have generally fallen

since 2011 but the pace increased greatly from mid-2014

when oil prices tumbled. March to May oil prices

corrected, USD generally weakened and the model as

well as CAD headed higher. However, oil prices has fallen

in June and July and BOC cut the rate in July making both

CAD and its fair value falling sharply again.


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SEBEER Long-term fair value, CAD Index

CAD Long-term Fair value

Technical view: BOE CAD index

19

Currency Strategy

Australian dollar The AUD has depreciated by more than 14% in trade

weighted terms over the last 12 months. After being

substantially overvalued, we regard the currency as now

fairly valued. The Australian economy is performing

reasonably well at present. It is expected to grow at

around trend in coming years, although low inflation,

falling commodity prices and weakness in China suggest

the RBA may cut rates again. While we do not expect the

AUD to weaken much further, downside pressure remains.

ECONOMIC FUNDAMENTALS Overall the Australian

economy is performing satisfactorily, despite several

pockets of weakness. According to the consensus

forecast, GDP is expected to grow by 2.3% this year and

2.7% in 2016, which is around trend. Net exports and

household spending are the largest contributors to

growth, while capital spending is subdued. In particular,

mining investments continue to decline although non-

mining investments also remain sluggish. Threats to the

economy are obvious with a continued slump in

commodity prices and economic weakness in China the

greatest risks. Nevertheless, the AUD has already

weakened substantially because of such uncertainty. In

trade weighted terms “the aussie” has depreciated by

more than 14% over the last 12 months providing some

support for exports. The labour market has stabilized

after previous weakness with unemployment around 6.0-

6.5% since mid-2014, although it rose sharply in August

as participation increased. Going forward, it is expected to

remain stable. Consumption growth has picked up

supported by falling interest rates, rising house prices (in

some regions) and a lower savings rate. �� 0

MONETARY POLICY The RBA reduced the cash rate by

25bps in Feb and again in May to stand currently at 2.0%.

Headline inflation was only 1.5% in Q2, partly due to

falling fuel prices, while core inflation was at the lower

end of the target range at 2.0%. AUD depreciation

probably helps exert some upward pressure on import

prices. However, since cost pressures within the economy

remain muted with low wage growth and unit labour costs

having declined for three consecutive quarters, there is

probably room to lower rates further if commodity prices

continue to fall or if demand from China remains weak.

We expect the RBA to cut by 25 bps to 1.75% at its Oct

meeting and to remain on hold in 2016. Current market

pricing discounts a 45% probability of two rate cuts to

1.50% within the next six months. While slightly more

aggressive than we expect, the monetary policy score

remains slightly negative. �� -1

FLOWS In recent quarters, the current account deficit

decreased to 2.7% of GDP in Q1 2015, due to stronger net

exports and improving net investment income flows.

However, the deficit is more than fully offset by net

portfolio inflows related to debt securities and equities,

and by direct investments. The broad basic balance,

representing the current account balance and net

portfolio flows, amounted to 3% of GDP in Q1. �� +1


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AUD Weighted score: -0.4

20

Currency Strategy

Australian dollar VALUATION We have re-estimated our long-term fair

value model resulting in a reduced fair value estimate for

the AUD trade weighted index. Lower commodity prices

have reduced terms of trade significantly from its highs a

couple of years ago, which is a key factor for the revision

of our estimate. Similarly lower commodity prices explain

why the RBA has been rather explicit about the aussie

overvaluation. Just recently the AUD basically reached

our long-term fair value estimate for the first time since

2010, which means that it probably is fairly valued today.

In contrast the real effective exchange rate indicates the

AUD still trades on the expensive side of its long-term

average. Altogether we consider the AUD quite properly

valued where it trades today. Further deterioration in

terms-of-trade or lower interest rates in Australia should

add further downside pressure on the AUD though. �� 0

POSITIONING Speculative accounts have since the beginning of June built up a net short position which is

getting close to the extreme short levels seen in March,

just before the general USD correction made the AUD

sentiment temporarily positive. Currently the net short

positioning is far from excessive and a correction is

therefore not expected. On the other hand, besides last

week, specs have been hesitant to add to their already

pronounced short positions. All in all this renders a

neutral positioning score. �� 0

TECHNICALS All medium-term trend-identifiers point

fiercely lower, but in the weeklies there is now a large gap

(92.10-90.10) which brought the index into a deep

overstretch. The distance to the ½-year average is

notable and momentum indicators are lean. All this calls

for a correction higher, at least back to the +92s before

selling may resume. �� -2

EVENT RISK, LIQUIDITY AND GLOBAL CYCLE In a low

yield environment Australian interest rates probably are

high enough to attract capital inflows. Previously, much

of the support for the AUD was related to high

commodity prices attracting foreign capital to the mining

sector. Falling commodity prices have been particularly

bad for the AUD. As the likelihood of a recovery in

commodity prices seems low this obstacle for the AUD is

likely to persist. Currently the market discounts a positive

probability for further rate cuts from the RBA, not the

least since the situation in China has worsened. We

expect the RBA to reduce its key rate again in October,

which should weigh on the currency. Therefore declining

commodity prices and additional easing are the main drivers for a weaker AUD.


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SEBEER Long-term fair value, AUD Index

AUD Long-term Fair value

Technical view: BOE AUD INDEX

21

Currency Strategy

New Zealand dollar Even though New Zealand still is one of the best,

performing economies in the developed world, there are

some dark clouds gathering. The 2015 GDP will miss the

previously estimated 3 percent and this is mainly due to

weak dairy markets and an earlier than expected

Canterbury rebuild. The low inflation is also causing

headaches to the RBNZ, which already has responded by

twice cutting the OCR by 0.25% to 3%. The NZD has

accordingly also taken a beating (the NZD index is down

almost 17% since April), something that will, at least

temporary, lift inflation. On the positive side high

immigration and a still very positive Terms of Trade (ToT)

can be found. Both RBNZ as well as the government will

impose new macro prudential measures in October in an

attempt to curb the running house price inflation in

Auckland (24% y/y).

ECONOMIC FUNDAMENTALS There’s still, but less

pronounced, divergence between the domestic and the

international economy. The NZ economy is still doing well

but is facing increasing headwinds. Of particular concern

is the low dairy prices (which we expect to stabilize soon),

the slowdown in China and the weakness in Australia.

PMI’s are falling but all remain in expansionary territory.

The Canterbury rebuild (residential) is coming to an end

but capacity should be relocated to the overheating

Auckland area (building activity value during Q2 reached

a 50year high). The labour market remains strong with

employment at record levels and unemployment (5.9%)

only a tad above last year’s multiyear low. Still high net

immigration continues to be a main factor in pushing

house prices in Auckland even higher. ��+1

MONETARY POLICY The RBNZ has cut its OCR to 3%

from 3.50% during the past months and is signalling that

there is more to come (market pricing currently indicates

a further 50bps reduction in the coming six months).

Inflation currently stands at 0.3% which is well below the

Bank’s 1-3% target zone. Short term we will see a small

pickup in inflation given the rapid decline of the NZD, but

given the recent decline in oil prices the effect will

probably be temporary. RBNZ is expected to cut its OCR

by another 25bps on Sept 10. �� -1

FLOWS After having deteriorated since 2014, the terms

of trade has again started to show a positive

development. The outlook for the C/A deficit has on the

other hand worsened some from previously expected

-3.3% to the current estimate, -3.6%. The net external

debt continues to increase as domestic lending at a large

extent is financed overseas. Canterbury earthquake

overseas reinsurance claims continues to decline and

now only NZD3.8 bn (of the original NZD16.4bn) remain

unsettled. However at the current pace, approximately

NZD 0.5 bn per quarter, the impact on the currency is

limited. Foreign holdings of NZ government debt remain

unchanged at ~70%. �� -1


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22

Currency Strategy

New Zealand dollar VALUATION After being substantially overvalued since

after the financial crisis the correction lower begun earlier

this year. This far the NZD has weakened by around 15%

in trade weighted terms, but according to our SEBEER

long-term fair value model it is still around 10% above its

fair value. Hence, there should be more to come. This is

moreover confirmed by the real effective exchange rate

which gives a similar outcome. New Zealand can still offer

an attractive yield and terms-of-trade is still quite

attractive, which temporarily could slow down further

corrections. At some point it will come, which is why we

maintain a negative score on valuation. �� -4

POSITIONING An excessively net short NZD vs. USD

position held by speculators has been scaled down

significantly since mid-July. Specs are still bearish NZD

but the extreme level has been corrected and a more

balanced positioning should be possible during coming

months. As there is no more correction pressure from an

excessively negative NZD positioning nor a strong

enough trend for less short positioning the positioning

score is currently neutral. �� 0

TECHNICALS Medium-term trend-identifiers all point

south, but the index is showing a screaming overstretch

which calls for a short-term correction higher. In this

context 110.80\113.30 is a primary correctional objective.

A little depending when this happens, the fast falling ½-

year exponentially weighted moving average band

(114.40\115.90) will play a role, but of course at a lower

level compared to where it is right now. �� -2

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE Global

growth continues to be sub-trend. Chinese growth is

being scrutinized and even more so after the recent

devaluation of the CNY. A more pronounced Chinese

slowdown will not only have directly negative effects to

the NZ economy but also indirect ones such as a possible

more pronounced Australian slowdown (underpinned by

a continued fall in particular in metals prices). The

runaway housing (+25% y/y) market in Auckland imposes

a rapidly rising risk to the NZ economy. The DTI (debt to

income ratio) is rising and has since 2012 risen from 6 to

almost 9. S&P accordingly downgraded the NZ bank

credit ratings given the risk of a sharp house price

correction. Given the high dependency of overseas

refinancing a house price correction risks could push risk

a NZ risk premium higher or even tightening the liquidity.

The falling dairy prices is also seen putting pressure on

farmer’s cash flow as much of past years investments has

been financed through bank loans.


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Technical view: BOE NZD index

23

Currency Strategy

Swiss franc The Swiss franc remained surprisingly resilient during the

height of the Greek crisis and weakened a bit after a

solution was found. Nevertheless, the currency remains

significantly overvalued and is therefore a huge burden

for the economy which will continue to grow only

moderately in coming quarters. CPI rates will remain

negative throughout 2016. Consequently, the Swiss

National Bank will continue to hold an easing bias to fight any upside pressure on the currency.

ECONOMIC FUNDAMENTALS In the second quarter of

2015 GDP growth surprised on the upside by growing

0.2% q/q and 1.2% resp. Private and public consumption

remained the backbone of the recovery. After a weak first

quarter, capital spending rebounded strongly indicating

that companies have become more optimistic on

business expectations. Looking ahead, the KOF leading

indicator improved to 100.7 points in August. Being

slightly above its long term average of 100 points it

indicates that the worst of the franc appreciation seems

to be behind the Swiss economy. It is pointing to an

improved momentum in the in the second half of 2015.

Overall, real GDP is expected to expand by 1.3% and

1.8% in 2015 and 2016 respectively. �� 0

MONETARY POLICY In the upcoming September

meeting, the SNB will see no reason to change its current

monetary strategy. After the steep fall in energy prices in

past weeks we expect the SNB to cut its conditional

inflation forecast. So far, the SNB expects the inflation

rate to return into positive territory in the first quarter of

2017. Now it looks more likely that the rate will stay

negative until the second half of 2017. Even this subdued

outlook is based on the assumption of a devaluation of

the Swiss franc over time. The outlook suggests that the

very accommodative monetary policy has to remain

longer in place than anticipated so far. The board will

stress that a tightening of monetary conditions will not be

tolerated. Consequently, the bank continues to hold an

easing bias. It stands ready to fight any renewed upward

pressure on the Swiss franc by intervening in currency

markets or cutting the deposit rate even further. As

regards macroeconomic forecasts, we expect the bank to

revise its outlook for GDP growth in 2015 to “slightly

above 1%, up from “just under 1%”. Overall, SNB policy

remains negative for the Swiss franc. �� 0

FLOWS The Swiss current account posted a surplus of

CHF 13.7bn in q1 2015, CHF 4.9bn higher than in q1 2014.

Cumulated over the past four quarters the surplus

totalled CHF50.2bn, down from CHF 65.9bn in the four

quarter period until q1 2014. Since the SNB June meeting

sight deposits have only risen by CHF 7bn to CHF 463bn,

suggesting there were no increased safe-haven flows into

Switzerland, which would have forced the SNB to

intervene. With the Greece problem disarmed we see no

need for a new round of safe-haven flows in coming

months, thus keeping the probability of renewed upward

pressures on the franc low. ��+2


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Risk appetite

Event risk

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24

Currency Strategy

Swiss franc VALUATION In January the SNB allowed its currency to

float freely again after being constrained by the 1.20-floor

in EUR/CHF for more than two years. It immediately

strengthened by more than 20% as the CHF continues to

attract foreign inflows. According to the long-term fair

value model 1.20 in EUR/CHF corresponded quite well

with our estimate, which means it once again is

significantly overvalued. After updating our SEBEER-

model fair value estimates for USD/CHF and EUR/CHF are

at 1.00 and 1.18 respectively. In real trade weighted terms

the CHF deviates more than 3 standard deviations from

the historical average. Valuation will eventually drag the

franc lower but probably it will be a slow process. �� -4

POSITIONING Speculators are currently net short CHF vs

USD. Before summer they held a net long position but

this one was scaled down over summer and turned into a

short position by the end of July. The strong negative

trend in sentiment renders a negative positioning score

as positioning is far from being excessive and thus no

correction to the trend is yet to be expected. �� -1

TECHNICALS The index is slowly grinding lower and the yearly moving average band (159.60/158.10) has ended up under pressure. If losing this support, the next (admittedly minor) Fibo extension ref at 156.40 could work as a beacon for the market. �� -1

LIQUIDITY, EVENT RISKS AND GLOBAL CYCLE With a

third bailout package for Greece now in place a Grexit is

very unlikely in the foreseeable future. Therefore the

probability of additional safe-haven flows to Switzerland

out of Greece is quite low. On the other hand, after a

recapitalization of Greek banks increased trust in these

institutions could lead to some flows back home.


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SEBEER Long-term fair value, CHF Index

CHF Long-term Fair value

Technical view: BOE CHF index

25

Currency Strategy

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Swedish krona

Our mantra for SEK in 2015 has been that its exchange

rate will hit a trade-weighted low in Q1 2015 before

cautiously appreciating (with lower EUR/SEK but higher

USD/SEK). Market positioning remains short SEK, while

corporate and institutional clients have historically high

FX exposure. Clearly, SEK is currently undervalued.

Further, Sweden retains a large current account surplus.

All these factors suggest underlying pressure to

appreciate will continue to support SEK. Indeed, the

Riksbank is fighting a clear-cut battle to prevent the

currency from becoming any stronger. The question

therefore arises: Is it appropriate to seek to do so by

continued easing given the obvious risks of a house price

bubble and threats to financial stability? We still expect

modest trade-weighted appreciation by SEK.

ECONOMIC FUNDAMENTALS Growth is set to continue

above trend in 2015/16 (SEB expects 3% for both years)

driven by very strong domestic demand (including private

consumption and residential investments). Probably, this

is hardly surprising given present very loose monetary

policy, including negative interest rates, the QE

programme and weak krona. Public spending is also likely

to become increasingly expansionary with deficits

growing. Although state debt is low by international

standards, private indebtedness continues to increase at

an unsustainable rate. Despite current steady economic

growth, we are becoming more cautious as

macro/financial stability risks have increased. �� +2

MONETARY POLICY We and the market have

underestimated the extent (and extreme lengths) to

which the Swedish central bank has chosen to ease policy

in order to prevent SEK from appreciating, boost inflation

expectations and signal clearly its intentions ahead of the

next round of wage bargaining starting in early 2016.

With inflation set to disappoint the Riksbank’s relatively

optimistic H2 2015 forecast, there is certainly a risk of

further easing at its October meeting. At some point

however (relatively soon) the scope for further expansion

will close: rates can be cut further but not very far (we

think -0.5-0.7% at most while the QE programme at SEK

135bn already risks having a highly adverse effect on

Swedish bond market liquidity. Though monetary policy

remains very negative for the SEK, it has almost

exhausted its capacity to disappoint or cause further

harm. �� -3

FLOWS The current account surplus remains near

7%/GDP. However its composition is changing as the

income surplus now far outstrips the previous high trade

surplus. Most likely (given the composition of the

Swedish international investments position) the income

surplus will fall as interest rates rise. Over time we also

expect a stronger SEK and a slightly lower trade surplus.

The largest quarterly changes are expected to involve

portfolio flows. �� +1

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

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SEK Weighted score: 0.6

26

Currency Strategy

Swedish krona VALUATION The trade weighted krona is clearly under-

valued compared to our long-term fair value model

(SEBEER). As SEK has continued to slide a weaker

exchange rate now contributes to a pick-up in imported

prices. This is important for Riksbank as it fights to reach

for the 2% inflation target. Nevertheless maintaining a

weak SEK is desired by the central bank. There are now

even fewer arguments why SEK is a barrier to external

trade at current levels. Valuation is hence long-term SEK

supportive. �� +2

POSITIONING Our speculative proxy position for SEK

versus USD indicates that speculators just switched into a

small long SEK position. Even if positioning over the past

two years mainly has been net short, the current level of

the long position is far from being excessive and why

there is no concern for normalization yet. The momentum

with in which the index has turned into favouring SEK is

strong enough to reflect the current positive SEK

sentiment and render a positive positioning score. �� +2

TECHNICALS Medium-term trend-identifiers to some

extent point higher still (towards a weaker SEK), but price

action over the past weeks express a doubt to whether

the trend is terminated through a "Double-top" at

115.70\80 or if it is just a wide & volatile consolidation.

The krona remains modestly negatively tilted until index-

support at 111.20/110.50 is given up. �� -1

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE Liquidity

remains poor at times which is a handicap for the

Swedish krona. And Riksbank government bond

purchases (SEK 135 bn) will gradually worsen bond

market liquidity likely to add a “liquidity premium” to the

krona. Current short SEK-positioning has made the

currency trade defensively appreciating in times of risk aversion. This trading pattern will not last.

Main risks for the krona are: 1) Adverse developments on

the Swedish housing market which could trigger foreign

investors to sell some of their record-high holdings of

Swedish bonds and equities. However, we still attach a

low probability to this event happening; 2) Continued

positive (low) inflation surprises pushing Riksbank to ease

policy further and; 3) Higher political risk premia /

uncertainties which will lower the foreign investor

appetite for Swedish assets; 4) Strong USD-appreciation

will likely cap the downside in EUR/SEK (as USD/SEK takes off).


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Technical view: KIX index

27


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28

Currency Strategy

eric

Norwegian krone VALUATION The krone is now extremely weak against

both EUR and USD, around 2 standard deviations from

the long-term averages. This suggests that the currency

pairs are extremely stretched which is unsustainable. Our

long-term fair value model (SEBEER) also suggests the

NOK is undervalued against EUR with fair value in

EUR/NOK just below 8.00. However, when considering

that Norwegian productivity growth has been too weak to

match the rapid growth in labour compensation, the real

effective exchange rate deflated by ULC indicates that

the NOK is still overvalued in real terms. While improving

competitiveness has been on authorities’ agenda, we

believe the current NOK REER to be at an acceptable

level. Overall, we find the current valuation supportive for

NOK. �� +3

POSITIONING Our NOK vs USD proxy for speculative

positioning index shows that speculators are short NOK,

however to a relatively small degree when compared to

the average positioning over recent years. Even if specs

were far shorter a few weeks back, the positive NOK

sentiment is not strong enough to render a positive score

- especially not since the last observation actually points

toward a possible rebuild of the short NOK position. �� 0

TECHNICALS A "B-wave high" at 105.10 has been taken

out, but admittedly not overly convincingly so. Yet this

still upholds some pressure to reach/break the 109.40

high. And there is a lot of wood to chop within a broad

dynamic support zone below (104/99) before NOK can

come out of this on a positive note. �� -2

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE The NOK

remains highly vulnerable towards oil. There is a risk that

any further cut-back in Norwegian oil sector activity will

cause more widespread and negative effects on the rest

of the economy. The greatest uncertainty is related to

very bearish sentiment indicators. Manufacturing is

hardest hit (though being a relative small part of the

economy), but the outlook for private consumption is

more uncertain. Consumer confidence posted its fourth

consecutive decline in Q3 to the lowest level in six years.

So far, however, households’ consumption of goods and

services has actually been very solid since last autumn.

This is partly explained by still-healthy growth in

households’ inflation-adjusted income. It cannot be ruled

out that confidence will make greater impact on overall

private consumption (~50% of mainland GDP) and the

housing market going forward. A further drop in oil prices

and a lowering of the long-term price outlook would

increase the likelihood of expected and actual rate cuts

by Norges Bank. In such a scenario, speculative flows

would turn even more negative towards the NOK. In the

other direction, a recovery in oil price, news that would

lower the probability for additional easing or increased fiscal spending would be NOK positive.


Technical view: NOK Index (I44)

29

Currency Strategy

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Danish krone Calmness is back in the Danish FX market. After a volatile

winter/spring dominated by the speculative attack on the

peg EURDKK has settled in a narrow range over summer,

7.457-7.465 (i.e. moving in a range of 0.1 percent). DKK is

trading at the cheaper end of the usual trading range. We

are still seeing steady outflows of DKK leading to

continuous intervention and draining of the FX reserve.

The FX reserve is about 100bn below the level where the

Nationalbank (NB) did its final rate cut. Extraordinary

measures taken by the NB in relation to the peg attack

have all been removed, so next step is normalising the

rate spread to Germany. While a single rate hike can’t be

excluded short-term, we expect the negative spread to

stay for a while longer. We don’t foresee meaningful

changes in EURDKK exchange rate during coming months.

ECONOMIC FUNDAMENTALS The Danish economy

continues to see steady growth. Second quarter GDP was

recently released showing modest growth of 0.2 percent

in the quarter. Still, this was the 8th consecutive quarter of

rising GDP. Relative to a year earlier GDP was up 1.8

percent - a sign that the economy is trending closer

towards normal cruising speed. Consumption has been a

main driver behind the acceleration during the past year

but it had a weak second quarter. However there’s little in

the fundamental backdrop that indicate this should be a

change of trend; employment gains are steady, consumer

confidence high, wage inflation improving and house

price appreciation firming. Stronger growth in Europe will

also be helpful, but fragile markets and falling growth in

China and EM constitutes a risk. We forecast annual GDP

growth at 2 percent in 2015 and at 2.5 percent in 2016-17

with ongoing improvement in already sound public

finances. We see little impact from the recent change of government from a growth perspective.

MONETARY POLICY Issuance of T-bills has been

resumed and the Nationalbank recently announced that

bond issuance will come back in October too. The

amount domestic banks can place at the NB at a rate

higher than the official deposit policy rate has also gone

back to normal. That means ‘crisis measures’ have all

been taken away again. Next step is normalising the

policy rate spread vs Eurozone, but although a single hike

could be seen we don’t expect a full normalisation in the

short run. We are not yet seeing any real deceleration of

FX outflows and are still looking at reserves 100bn above the level in January.

FLOWS The current account is still rock solid at about 7

percent of GDP. Net trade is contributing stronger

recently while the income account is weakening a bit.

This strong fundamental driver of flows is however still

dominated in the short run by hedging flows as well as

possibly speculative flows relating to this winter’ s

currency crisis.

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Jan 15

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Mar 15

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Jul 15

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DKKbn

Danish currency reserve

Unwinding of interventions

made since rate cut to -0.75%

"Normalisation" of currency

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30

Currency Strategy

Danish krone VALUATION DKK is trading at the weaker end of the

historical band vs EUR. In a broader perspective, the

chronic sizeable trade and current account surpluses do

not indicate that DKK would be overvalued – rather the

opposite. But as this broader perspective would only

become relevant in flexible exchange rate context where

the peg would be scraped it carries little relevance. Denmark leaving the peg seems extremely unlikely.

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE

Partly due to size DKK is not the most liquid market. In a

global context DKK is rather neutral to the cycle, just as

EUR, neither really cyclical nor outright defensive.

We see two events which in the near term have the

potential to affect the EURDKK. One would be if ECB

reacts to current market turmoil and falling inflation

expectations by adjusting upward the size of the QE

program. This could strengthen the Krone relative to euro

by narrowing the short rate spread. The other event

which could see an impact would be renewed turbulence

in Greece in relation to the upcoming election. This is not

very likely but political turmoil could in an extreme

scenario reinstate worries on the euro as a currency

thereby directing safe haven flows to Denmark. This

could again create an appreciation pressure on DKK.

However, as the Danish Nationalbank is still intervening

to support Kroner in the context of FX outflows it is most

likely that both of the mentioned events would only spur

an adjustment in the level of intervention or lead to

postponement of already planned rate hikes from the

Nationalbank (should there be any).


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31

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Russian rouble We have revised our USD/RUB forecast since our last

Currency Strategy based on a new, lower oil price

forecast. With oil (Brent) seen averaging $54.1 per barrel

(down from $70) in 2015 and $55 per barrel in 2016, we

expect USD/RUB at 70 by the end of 2015 and at 75 by

the end of 2016.

ECONOMIC FUNDAMENTALS The rationale behind the

forecast is the high correlation between changes in the

price of oil and the RUB exchange rate. In addition, due

the strong dependence of government revenues on oil

(roughly 50% of revenues come from the hydrocarbon

industry), the central bank will let the RUB depreciate, as

long as the fall is not too precipitous. The federal

government budget deficit was 1.1% of GDP in a year

when oil prices averaged RUB 2,750 per barrel (in

inflation adjusted terms [Jan 2010=100]). So far this year,

the price of Brent has averaged roughly RUB 2,130 per

barrel. The government expects the budget deficit to

widen to 3.7%, of which the bulk will be covered by

tapping into the Reserve Fund. However, the Kremlin is

wary of using reserves to fund a budget shortfall resulting

from lower oil prices, as it suspects oil prices may stay low

for years to come. The government will cut spending on

essentially everything except pensions and defence. The

central bank is caught between a rock and a hard place.

On the one hand, a stronger RUB would stem inflationary

pressures and support banks with external liabilities and

domestic assets. On the other hand, it will be under

pressure to let the RUB depreciate with oil to boost

budget revenues. If oil prices fall again (as we expect), the

central bank will most likely let the RUB weaken,

intervening only if the fall is too precipitous. To ensure

financial stability, it will call on the government to

support struggling banks through direct capital injections.

Real GDP contracted by 3.4% y/y in 1H ’15, and looks set

to end the year down by 4.0%, on the back of lower oil

prices. Sanctions by the EU are set to expire on January

31, 2016, but will probably be extended another six

months. Inflation has jumped, reaching 15.6% y/y in July.

It has moderated slightly since March, but will probably

be sticky. The key drag on the economy is private

consumption, which has taken a hit from a fall in real

household income and rising unemployment. �� -1

MONETARY POLICY The CBR has cut the policy rate by

600bps since January to 11.0%. It maintains a dovish

stance, but will likely keep the rate on hold for now to

prevent excessive RUB weakness. When oil prices

stabilise, the CBR will resume cutting the policy rate.

�� -1

FLOWS The current account surplus was $59.5bn in

2014 and $48.1bn in 1H 2015 on the back of lower

merchandise imports. We see the current account

continuing to generate a surplus. Private capital flows

recorded another net outflow in 1H 2015, but the pace of

capital outflows has slowed, stabilising reserves around

$36bn. We expect net capital outflows to continue in

2015, but at a manageable pace for the CBR. �� 0

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Global cycle

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Monetary policy

Carry

Fundamentals

RUB Weighted score: -1.1

32

Currency Strategy

Russian rouble VALUATION The swings in the valuation of the RUB have

been quite extraordinary. Over the past 12 months, it has

gone from being overvalued by some 30% against an

estimated fair value of 45 against the USD to be

undervalued by between 25% and 30%. The real

effective exchange rate (REER) is currently 14% below its

10-year average. However, for the federal government

budget to balance at an average price of Brent at

$54.1/barrel, USD/RUB would need to move to 82,

assuming that the budget balances around an average

rate of RUB 2,700/barrel (in inflation-adjusted terms).

This back-of-the-envelope calculation suggests that the

RUB is currently overvalued by some 26%. Yet, with oil

prices averaging more than $50/barrel, the RUB is

unlikely to weaken that much. �� -2

POSITIONING Speculators in the RUB have turned from

being long the RUB at the time of our previous Currency

Strategy to being net short on anticipation of the RUB

weakening with oil. We expect positioning to be less

extreme over the coming months as oil prices stabilise at

lower levels and the CBR intervenes verbally to support

the RUB. The 3 score is due to the expectation that

speculators will begin to normalize their short position.

�� +3

TECHNICALS The rouble waxed and waned during the

correctional sequence following last year’s panic-peak at

71.80. A correctional low (48.80) is probably behind us

now and all focus is back on 71.80. Last week’s potentially

short-term bearish print in USD/RUB is likely not enough

to save the day for the (t)rouble, which has a lot of wood

to chop in a wider (61.10/52.10) area before getting out in

the clear. Far more likely is an extension higher, taking

out both 71.80 & 78.00 before this is over. �� -3

EVENT RISK, LIQUIDITY AND GLOBAL CYCLE The

rouble is facing two key risks: 1) a new fall in the price of

oil; and 2) a deterioration in relations with the EU and US.

While oil has room to fall further, another 50% decline

appears unlikely. Regarding relations with the “West”,

Russia is unlikely to expand the war in eastern Ukraine

because it does not need to in order to prevent Ukraine

from joining NATO and the EU. The rebels would like to

gain control over a larger, more economically viable area

including the port city of Mariupol and the coke factory in

Avdiivka. However, the potential cost of capturing these

strategically and economically important sites would

likely be high and prompt additional sanctions. In such a

scenario, which has a likelihood of roughly 25%, capital

outflows would resume and send the RUB down again.

�� -1

Technical View: USD/RUB

33

Currency Strategy

E one


04 05 06 07

Con

trac

ts (

thou

sand

s)

-25

0

25

50

75

100

125

1.150

1.200

1.250

1.300

1.350




Chinese yuan We expect USD/CNY to end this year at 6.6 and 6.7 in

2016. CNY went through a tectonic shift this month when

it devalued by close to 5% and more importantly changed

the daily fixing methodology to be market driven. CNY

has taken a big step towards a free floating currency.

Although capital account needs to be more opened to be

a free float, this is a once in a decade shift similar to when

CNY depegged from the USD in July 2005 and China

joined the WTO in 2001.

ECONOMIC FUNDAMENTALS Growth is expected to

decelerate to 6.8% this year from 7.4% in 2014 and

continue weakening to 6.5% in 2016. The economy is

facing headwinds from reforms, lacklustre export growth,

reduction in investment as it moves away from heavy

industry to services and downturn in domestic demand

led by the construction sector. High inventory and tighter

lending standards are slowing construction activity.

Policymakers are finally awakening to the steepness in

the downturn and accelerating policy easing to stabilize

the economy. We think by 1Q 2016, construction activity

will slowly recover from contracting to a slightly positive.

�� -1

MONETARY POLICY Monetary conditions are easing

and the process will accelerate. Inflation has fallen to

1.6%, well below the 3% target we expect the PBoC to

cut deposit rates to 1.00% by YE-2016 from 1.75%. We

also expect the reserve requirement ratio to be cut by

200bps to 15%. China is moving away from capital

intensive economy to a service oriented and consumer

based economy, which will also structurally reduce the

demand for funding and reduce rates. Lastly, China has

embarked on floating the currency so that it does not

inherit the US interest rate hike that are to come to make

sure that domestic monetary conditions remain ample.

�� -1

FLOWS The shift in making the currency more free

floating will change the flow dynamics and what will drive

currency movements. China still maintains a steady long

term inflows that supports the currency over time with a

current account surplus and net FDI inflows, which add

up to 5% of GDP. However, a more liberal currency

means that short term flows like capital flows will drive

currency movements in the near term. Capital flows have

been heading outwards and leading to CNY weakness.

For the next 12 months, capital outflows will remain

because domestic companies will need to play catch up

and hedge their currency exposure. Most Chinese

corporates have been long CNY vs USD because the

currency was appreciating and more importantly the

volatility was too low to make a big impact on profits.

Now with a more floating exchange rate, your entire

year’s profit can be wiped out in several days. This will

force domestic to diversify and continue to buy USD and

weaken the CNY. �� -1

-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Global cycle

Event risk

Ec. Surprise

Liquidity

Technicals

Positioning

Valuation

Flows

Monetary policy

Carry

Fundamentals

CNY Weighted score: -0.9

-30

-20

-10

0

10

20

30

40

50

07 08 09 10 11 12 13 14 15

SEB China construction indicator

Steel Production

% yoy 3mma

10

15

20

25

30

35

40

05 06 07 08 09 10 11 12 13 14 15

Bank Loan Total loan (incl TSF)% yoy

-8

-6

-4

-2

0

2

4

6

8

10

12

05 06 07 08 09 10 11 12 13 14 15

China BOP % of GDP

Current Account FDI Capital flow ex FDI

34

Currency Strategy

Chinese yuan VALUATION China’s government and IMF have both

stated that CNY has reached fair value. Furthermore,

CNY’s real and nominal effective exchange rates (REER

and NEER) have strengthened by 30% since 2009 and

over 10% in the last 12 months from USD strength. The

pace of REER appreciation is one reason China devalued

recently and China considers its currency fair or slightly

over-valued. �� 0

POSITIONING We look at how spot is trading relative to

daily fixing and the band of +/- 2% and spot is now at

fixing, meaning positioning is flat. However, over the

next 6-12 months, we think domestics are long CNY from

low volatility and multiple years of currency appreciation

and will need to reduce those positions. �� -1

TECHNICALS The CNY devaluation left no financial

market stone unturned. As for USD/CNH one must expect

additional gains beyond the 2011 high of 6.59 which was

equaled during the rally last month. A short-term

correction lower is thought ebb no later than in the

6.36/34-area. Once 6.53 is taken out, a correctional low is

nailed and fresh highs should thereafter be traded. �� -3

LIQUIDITY, EVENT RISK AND GLOBAL CYCLE Even CNY has succumb to the mighty USD and the global

cycle. Spot market may still be controllable for PBoC, for

forward investors, the CNY can sell off quite a bit very

rapidly and makes it vulnerable to global events. The key

event risk for China in the next 12 months whether IMF

accepts CNY into the SDR basket of currencies in

November. We think CNY will be included or hinted to be

added in 2016 and provide a brief relief rally for CNY.

However, it will be a disaster if IMF does not accept CNY.

It is very clear that China is seeking to be part of the

international community and when good deeds are

rejected, China can turn away and start their own IMF or

international organizations like AIIB. When the Japanese

Yen was included in SDR in 1980, it did not meet many of

the criteria but was included for political reasons. IMF

should do the same but alienating China would be

negative for the global risk environment.


04 05 06 07

Con

trac

ts (

thou

sand

s)

-25

0

25

50

75

100

125

1.150

1.200

1.250

1.300

1.350




85

90

95

100

105

110

115

120

125

130

135

07 08 09 10 11 12 13 14 15

NEERREER

CNY

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

USD/CNY spot spread to fixing %

CNY High Low

Technical view: USD/CNH

35

Currency Strategy

SEB INTERNAL SCANDIE FLOW ANALYSIS FX is an over-the-counter (OTC) product. Consequently,

neither volumes nor flows are readily available. For G7

currencies, positioning data provided weekly by the

Commitment of Traders (COT) report are widely used as

a proxy for investor flows and positioning. However, no

COT data for SEK or NOK is available. We have therefore

built an analytical framework around our own flows

which we use to assess market sentiment and positioning

for SEK and NOK where the client category foreign

financial institutions is used as proxy for speculative

flows.

Continued downscaling of the short SEK position Speculative flows have generally been the main driver of

EUR/SEK since H2 2012, reacting primarily to changes in

the Riksbank’s outlook for monetary policy. The chart

below supports such a notion as it shows how closely

speculators weekly aggregated net flow and EUR/SEK

have followed each other since 2013. If assuming that

speculators where positioned neutral at the beginning of

2013 they would currently, based on our flows, be very

short SEK vs. EUR, but not as short as earlier in 2015.

Mid-April 2015 specs according to our index begun to

scale back on their long-term short SEK position. Just

ahead of the Riksbank rate decision in July they scaled

down even more. With fundamentals supporting SEK and

almost only the Riksbank working to weaken SEK we see

less and less reason for holding on to, and even more to

add to, the short SEK position. Therefore we expect the

index to continue to indicate downscaling of the short

position in the coming months.

Note that the relatively close relationship between

speculative positioning according to our index and

EUR/SEK temporarily broke down in Feb 2015 when

EUR/SEK fell sharply without our index moving much.

Looking at the other client categories it turned out that it

was mainly domestic institutions that sold SEK during

this period.

Speculative positioning vs. EUR/SEK

8.20

8.40

8.60

8.80

9.00

9.20

9.40

9.60

9.80-2,500,00 0,000

-2,000,000,000

-1 ,500,000,000

-1,000,000,000

- 500,00 0,000

0

500,000,000

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

Jan-15

Mar-15

May-15

Jul-15

Sep-15

EUR/SEK (reversed)

Speculative positioning (lhs) EUR/SEK (rhs)

Short

SEK

Long

Excessively large short NOK positioning Using a similar approach on EUR/NOK flows as we do on

EUR/SEK, has shown a relative close relationship

between our aggregated speculative client flows and

EUR/NOK. However, we do not have as long time series

for the NOK flow analysis as we do for SEK.

If assuming that speculators where positioned neutral at

the beginning of 2014 they would currently be very short

NOK. The negative NOK sentiment has been ongoing

since April 2015 and has taken positioning from a small

long to the current large short. As this is the shortest

position in at least two years it looks excessive and thus

sensitive to a normalization process. However, such a

normalization, which would support NOK, needs an

external trigger such as e.g. a longer lasting correction

higher in oil prices. Speculative positioning vs. EUR/NOK

Short

NO

KLo

ng

NO

K

7.5

7.75

8

8.25

8.5

8.75

9

9.25

9.5

-290,000,000

-190,000,000

-90,000,000

10,000,000

110 ,000,0 00

210 ,000,0 00

310 ,000,0 00

De

c-1

3

Jan

-14

Feb

-14

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Ma

r-1

5

Ap

r-1

5

Ma

y-1

5

Jun

-15

Jul-

15

Au

g-1

5

EU

R/N

OK

(re

vers

ed

)

Speculative positioning EUR/NOK (reversed)

Background information

Input data: Since SEB’s share of trading in Scandies is large, our order flow and FX tick database may provide significant information

regarding market sentiment. Consequently, we aggregate tick-data on

daily, weekly and monthly basis.

Measures: Using input data for net flows (all buy orders minus all sell

orders during the period in question) and volume (all buy orders plus all

sell orders during the same period) we work primarily with two

indicators to provide information on SEK and NOK sentiment and

positioning: • Net flow (%): Net flow / volume (sentiment proxy)

• Aggregated net flow (position proxy)

Client categorization: Of course, while total net flow and volume are

interesting, we believe (a view also supported by research findings1 and

in-line with how Commitment of traders’ data is analyzed2) an

examination of client subcategories provides even better information.

We use two basic categorizations, one differentiating between

domestic and foreign clients and the other between corporate and

financials providing us with the four sub-categories: 1. Foreign financial institutions (proxy for speculative flows)

2. Foreign corprorates

3. Domestic financial institutions

4. Domestic corporates

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

Rates, The MIT Press, 2006. 2 The Commitment of traders 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 a

widely used praxis is to follow only the non-commercial flows.

36

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]

Per Hammarlund

+46 8 506 231 77

[email protected]

Karl Steiner

+46 8 506 231 04

[email protected]

Anders Söderberg

+46 8 506 230 21

[email protected]

COPENHAGEN

Frederik Engholm-Hansen

+45 33 28 14 69

[email protected]

FRANKFURT

Thomas Köbel

+49 69 97 27 12 45

[email protected]

OSLO

Erica Blomgren

+47 22 82 72 77

[email protected]

SINGAPORE

Sean Yokota

+65 6505 0500

[email protected]

37

Disclaimer Analyst Certification We, 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 & limitations Opinions, 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 be reliable, 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.

Recipients 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. =

38

Currency Strategy

Notes

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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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