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Scandi Outlook Mixed for 2H

The economic outlook for Scandinavian
economies looks mixed in the second part of 2016, with upcoming monetary policy
decisions and a potential rebound in oil prices among the factors that may
boost economic performance, market commentators tell Profit & Loss.

Sweden has so far been the best performer
in the region, having seen steady economic growth in the years following the
economic crisis, although some slowdown has been seen recently.

“Sweden is performing best, driven by
strong credit growth and very easy central bank policy,” says John Hardy, head
of FX strategy at Saxo Bank. “With highly stimulative ECB policies, key export
markets in Europe continue to perform well enough to keep a positive outlook
for exports for now.”

However, “a longer term negative is the
risk of a slowdown in credit once the Riksbank’s stimulus effect slows, as
Sweden has one of the most over-leveraged private sectors in the world,
especially its housing bubble”, although growth may manage 3% annualised over
the next few quarters, he explains.

GDP in Sweden is still expected to show
around 3% growth this year compared to Norway’s 0.5%, agrees Anders Eklof,
chief FX strategist at Swedbank. “The extremely low rates together with a
healthy development in disposable incomes keep the consumer floating” and “more
importantly, the refuge crisis where Sweden has received a record amount of
refugees has boosted public consumption, but also housing investments,” he adds.

“The Riksbank is doing their best to stop
an undervalued krona from appreciating as this would risk implying inflation
again missing target,” says Eklof. “Swedish bond yields across the curve are
trading fairly close to the euro curve as the Riksbank is continuing its bond
buying until year-end, even if at a slower pace than during the first half of
the year.”

Carl Hammer, chief currency strategist at
SEB, points out, “The ultimate question in Sweden is to what extent the
Riksbank can continue to run current monetary policy following any steps the
ECB is taking. At one point in time, it will be reasonable to see the Riksbank
starting to deviate from the ECB because of stronger fundamentals in Sweden.
The problem is of course that as long as inflation is below target, the
Riksbank remains uneasy about the prospect of having a much stronger exchange
rate. This is the reason it has continued to expand monetary policy.”

Eklof meanwhile, notes, “It is fairly
likely that Riksbank will continue to expand and lengthen its QE program in
October. If they don’t do that, I would expect a stronger outlook for the
Swedish kroner. The Riksbank will not dare stop buying bonds until there is a
signal of an ECB taper. Looking forward, we see EUR/SEK slowly [inching] back
toward the 9.30 area…our 6-12 month target in EUR/SEK is still around 9.00.”

Meanwhile, an opposite situation has emerged
in Norway, where “growth has been slowing down substantially due to the fall in
oil prices”, according to Hammer.

A potential rate cut by the central bank
has come into focus recently, although swings in the currency might change this
prospect heading into September. “Norway’s central bank had a projection that
they would cut interest rates in September,” Hammer says, “However, several
banks have started to revise that call as inflation is well above target and
the economy has shown signs of improvement. Moreover, the central bank is uneasy
about house prices as well.

“The market is now pricing around 25%
probability of a rate cut,” he continues. “The closer we get to 9.0 in EUR/NOK,
the more likely is the rate cut we project. On the other hand, if we’re up
close to 9.50, then it’s much more of a close call and I would see an unchanged
decision to be more probable.”

Best
Trades?

On the back of this potential turn and
looking at the best possible trades in Scandinavian markets, “one of those
trades we look at in the coming period is to take profit on recommended short
EUR/NOK down around 9.00/10,” Hammer says. “We have a short trading
recommendation on euro/krona that we maintain, but if we get closer to 9.00 we
would advise to reverse that position buying EUR/NOK or selling Norwegian krone
and buying Swedish krona.”

Eklof agrees. “As we see oil prices move
gradually higher toward $55 a barrel toward the end of the year, we see some
potential for EUR/NOK to break below 9.00 for the first time since summer last
year,” he says.

“NOK may represent more value for investors
looking for a NOK rally versus SEK or EUR – though it would likely prove a
modest affair,” suggests Hardy. “At these very low yields, we’re wondering if
bond markets are ripe for a correction, and Sweden has negative bond yields out
to beyond seven years, so we’re not interested in bond exposures to Sweden in
particular.

“Short the Swedish krone versus the dollar
is one way to trade a global bond market correction, which could strongly
favour the dollar,” he adds.

Furthermore, while the market focuses
mostly on the Norwegian and Swedish dynamics, elsewhere in the region an
essential alignment with Europe is being observed, says Las Olsen, chief
economist at Danske Bank.

“In Denmark, business is very much what we
have seen in the Euro area,” he says, adding, “We’re not far away from full
employment, but the growth rate is very low, as in the rest of Europe – or even
lower, but that is mostly for technical reasons. Significant export shares are
going to China from Nordic countries. The slowdown has very much affected the
shipping sector in Denmark.”

Meanwhile, Finland “is now starting to
emerge from a long crisis and it is pushing through some reforms, which should
make Finland more competitive in the future” having been hit by “the forest
sector crisis, and by the economic crisis in Russia, which has hit the tourism
sector,” Olsen adds.

Overall, in the coming months as Nordic
countries “are very integrated into the European economy, if there’s some kind
of crisis in the Euro area it would definitely be seen” in the Scandinavia
area, particularly in “Sweden and Finland (which are) very vulnerable to a
further slowdown in business investment”, Olsen says.

Colin Lambert

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