The Scandies are still twinkling

Hawkish Scandi central banks 
The messages from the Riksbank and Norges Bank at last week’s policy meetings were in
our view on the hawkish side. Both central banks acknowledge that growth among trading
partners has improved and that domestic credit growth is worrisome.

We now believe that Swedish policy rates will reach 2.5% end 2011, see in that respect
Strategy: How to play the Riksbank from December 15. We also believe that the risk of
an earlier hike in Norway has increased after the policy meeting at Norges Bank. We have
long argued for a May hike and we believe the market will start to price this in as well.
We forecast that Norwegian policy rates will reach 2.75% end 2011. Hence, we see
upside to Scandi rates from here.

Regarding the currencies, we still see further value in both NOK and SEK - even after the
strong moves over the past month that have sent EUR/SEK down from 9.40 in November
to currently 9.07 and EUR/NOK down from 8.20 to 7.90. In 2011, we believe, EUR/SEK
could fall to 8.70 and EUR/NOK to 7.70. Both currencies are expected to receive support
from central banks hiking rates more than is currently priced in the market, strong
balances, healthy growth rates and a generally positive risk sentiment in 2011. The latter
could be a particularly powerful force driving EUR/NOK and EUR/SEK lower if the euro
at the same time is under pressure due to debt concerns.  

If we are correct both SEK and NOK will be fundamentally overvalued compared to
EUR. However, with euro debt concerns, strong growth, healthy balances and rising rates
we doubt we will see any correction due to valuation in 2011. But there is a limit to how
much overvaluation we should expect for the Scandies in 2011. Norges Bank is already
concerned about the strength of NOK and the Riksbank has started to voice concern as
well about the strength of SEK.    

Strong Swiss franc also in 2011… but not a stronger franc 
This week the Swiss franc reached the strongest level ever at 1.2759 and it has been the
best performing G10 currency over the past month, posting a new record high against the
euro, and there could well be further potential – though risks are becoming increasingly
two-sided. The Swiss National Bank (SNB) stayed on hold at its December meeting and
while it did warn that action would be taken should deflation risks re-emerge (i.e. that it
would bring back interventions if the franc appreciation becomes too violent) it was not
enough to turn the downward EUR/CHF trend around. As long as concerns remain about
the eurozone peripherals the franc is likely to keep trading at a premium against the euro
and further appreciations can certainly not be ruled out. It is, however, not a one-way
street. The normalization on the euro money market means that the interest rate spread
has widened significantly in the euro’s favour over the past quarters. This lifts the floor
below EUR/CHF. Given that EUR/USD corrects higher, as we expect, EUR/CHF should
also gradually trade higher as we enter 2011. The outlook for earlier interest rate hikes
and strong fundamentals in Switzerland should prevent a full normalization though, and
hence keep the franc in overvalued territory – as reflected in our 1.32 6–month forecast.