Download - Macro Research - Handelsbanken

The ECB could
adopt a policy of
credit or quantitative
easing
EUR/USD to drift lower
As financial markets are now performing better and better and the deleveraging process is
becoming less disorderly, one of the causes of USD strength is abating (see, for instance,
the BIS report on “the US dollar shortage in global banking”). All the same, we expect
EUR/USD to drift lower on the back of further interest rate cuts in the eurozone (at least
one more 25bp is due in May), while the ECB could still adopt a policy of credit or quantitative
easing. The relationship between the US and the eurozone in the business cycle also
suggests some downside pressure on the EUR.
While the eurozone has an economy that has been less “unbalanced” than the US, it has its
own set of problems that are expected to take a toll in coming years. Countries such as Spain
and Greece (and Italy, and Ireland, and Portugal…) are facing a severe downturn and their
budget deficits are rising sharply. Intra-eurozone sovereign spreads are wide and could widen
further as bond supply increases, leading to increasing tensions within the eurozone. Several
of these countries also face somewhat of a “cost crisis” due to ballooning labour costs relative
to the eurozone average since the currency’s inception. The financial problems relating to
Eastern Europe are also likely to remain a concern for the next year or two.
We do not predict a strong growth rebound in either geography, so volatile macro data is
bound to trigger sharp swings in the currency pair as optimism is replaced by pessimism
and vice-versa. We nonetheless foresee the EUR/USD at 1.28, 1.25 and 1.20 in three, six
and 12 months respectively. In two years time, we see EUR/USD at 1.20.
USD & GBP have been tested
TCW and business confidence
Sources: Handelsbanken Capital Markets and Reuters Ecowin
Note: Short rates here equals expected 3-month deposit rates in December 2009
SEK to strengthen gradually while uncertain economic outlook weighs
The Swedish krona has not fared well since the escalation of the financial crisis late last year.
While the depreciation was extraordinarily large (unseen since the 1992 devaluation), SEK
weakness during turbulent times is a well-established historical fact.
The economic climate
is likely to remain
very uncertain
We expect sentiment indicators to have bottomed out and to gradually rise throughout the year
as the economy contracts less swiftly. As a result, the SEK should start to strengthen. That said,
consensus has only once bet on a weaker SEK in a 12-month horizon. For the past ten years,
being optimistic on the krona has been a losing proposition. After all, the economic climate is
likely to remain very uncertain.
Our long-term model indicates a fair value for EUR/SEK of around 9.30. Even so, the experience
following the devaluation in 1992 may serve as a cautionary example. Back then the model
indicated overvaluation in 1990 – two years before the Riksbank was forced to devalue. Postdevaluation,
the model indicated that the currency had become “too weak”. It nonetheless took
until late 1995 before the Swedish currency finally approached the model estimate.
40 April 28, 2009