Currency Strategy: Scandie Parity As The USD Climbs Higher

Scandie parity as the USD climbs higher
In 2013, small, sound currencies with little debt stopped outperforming for several reasons. Mainly, non-G4 currencies were traded at very high levels, while some were overvalued. Their central banks responded by lowering rates (Australia) or through verbal interventions (Norway). Simultaneously, growth prospects finally improved in core countries such as the UK and US. We believe large, liquid currencies will continue to outperform in H1 2014, driven primarily by growth prospects and central bank expectations, as shown by our SEB FX Scorecard. SEB still projects above consensus US growth of 3.3% in 2014. We think the US labour market may improve faster than the Fed estimates, which may cause the bank to reduce QE3 more rapidly. As a result, we still expect EUR/USD to trade with a downside bias although the rate of depreciation will be slow as US monetary policy remains very relaxed. SEB also believes the ECB will launch its own QE program later this spring. While portfolio inflows may anticipate this and seek to benefit from lower EMU yields, the euro should weaken once QE is announced as it signals continued weak EMU developments. Consistent with two of our top trade recommendations for 2014, JPY and CAD have further weakened so far this year vs. USD. Following near-term consolidation, especially concerning JPY where speculative accounts are very short, we expect USD/JPY and USD/CAD trends to continue higher. Sterling depends on the BOE outlook. We see no convincing arguments why the bank should hike rates before H2 2015. NZD has performed extremely well and looks set to continue doing so, at least in the short-term. However, like the BOE we cannot see the RBNZ hike as markets currently discount. As these expectations recede, the Kiwi will weaken. Finally, Scandies still diverge. We maintain our lower NOK/SEK forecast. After some near-term consolidation in EUR/SEK, we expect the downtrend to resume as the Swedish growth outlook improves. BUY THE CS BASKET We recommend buying a G10 currency overlay basket with the following composition (based on the SEB FX Scorecard): Buy USD (30%), SEK (30%), EUR (18%), GBP (12%) and NOK (10%). Sell CAD (30%), JPY (30%), CHF (20%), NZD (19%) and AUD (1%).
WEDNESDAY 22 JANUARY 2014
EDITOR Carl Hammer + 46 8 506 231 28
SEB FX Scorecard
Total weighted score, 3-6 mth outlook
CNY USD SEK EUR DKK GBP NOK AUD RUB NZD CHF JPY CAD -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1
SELL GBP/SEK Whilst Sterling is expected to maintain current stronger levels short-term, we expect BOE to cool current expectations on higher policy rates in UK before YE 2014. We target a move back towards 10.20. BUY 3MTH DNT IN USD/SEK. We expect continued rangetrading (with small upside bias) in USD/SEK. A 3 month 6.75/6.25 DNT is approx. 28% of notional pay-out. BUY USD/NOK We expect the Norwegian currency to be weak in-line with other commodity currencies. Although our base case is for no changes from Norges Bank 2014 the surprisingly weak private consumption/falling house prices and weaker petroleum-related investments may push Norges Bank to cut rates. Foreign appetites for Norwegian assets also continue to be weak/negative.
You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.
Currency Strategy
Forecasts and FX Scorecard

FX forecasts
21-Jan
EUR/USD EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK EUR/DKK USD/RUB 1.35 142 0.82 1.24 8.80 8.37 7.46 34.0 105 1.64 1.10 0.91 0.88 0.83 6.50 10.67 6.21 7.11 1.05 6.19 6.05
SEB
Q1 14
1.35 142 0.83 1.24 8.75 8.40 7.46 34.1 105 1.63 1.11 0.92 0.87 0.82 6.48 10.56 6.17 7.06 1.04 6.22 6.06
Consensus*
Q4 14
1.28 143 0.83 1.26 8.50 8.50 7.46 36.0 112 1.55 1.12 0.98 0.85 0.75 6.64 10.29 5.93 6.75 1.00 6.64 5.90
Contents
Forecasts The big picture USD EUR JPY GBP CAD AUD NZD CHF SEK NOK DKK RUB CNY Guide to indicators Internal FX flows Contacts 2 5 10 12 14 16 18 20 22 24 26 28 30 32 34 36 37 38
Q2 14
1.34 145 0.83 1.25 8.65 8.45 7.46 34.7 108 1.62 1.13 0.93 0.86 0.80 6.46 10.46 5.98 6.92 1.02 6.31 6.02
Q1 14
1.34 141 0.82 1.24 8.90 8.25 7.46 33.2 105 1.63 1.07 0.92 0.88 0.82 6.64 10.82 6.32 7.18 1.08 6.17 6.21
Q2 14
1.31 140 0.81 1.24 8.80 8.25 7.46 33.5 107 1.62 1.08 0.94 0.87 0.81 6.71 10.87 6.27 7.10 1.07 6.23 6.17
Cross rates
USD/JPY GBP/USD USD/CAD USD/CHF AUD/USD NZD/USD USD/SEK GBP/SEK JPY/SEK CHF/SEK NOK/SEK USD/NOK USD/CNY
*Bloomberg survey FX forecasts.
SEB FX G10 Scorecard, Medium Term

Weights
Fundamentals Carry Mon. policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Risk appetite 20.0% 5.0% 20.0% 10.0% 15.0% 5.0% 10.0% 0.0% 10.0% 0.0% 5.0%
USD
+3 -1 0 -1 0 0 +2 +4 -2 0 0 +0.3
EUR
+1 -1 -1 +2 -1 0 +1 +2 +1 0 0 +0.2
JPY
+1 0 -2 0 +1 +3 -2 +3 0 0 -1 -0.1
GBP
+3 -1 -2 -1 0 0 +2 +2 0 0 0 +0.1
CAD
+1 0 +1 -1 0 0 -5 -1 -2 0 0 -0.2
AUD
+2 +1 0 0 0 0 -4 -3 +1 0 0 +0.1
NZD
+3 +2 0 -2 -5 +1 +1 -3 0 0 0 -0.0
CHF
+1 -1 0 +2 -1 -1 0 0 -1 0 0 -0.0
SEK
+1 0 -1 +1 +1 0 -1 -3 +3 0 0 +0.3
NOK
+1 0 0 0 +1 0 -3 -4 0 0 0 +0.1
DKK
+1 -2 -1 +1 0 +1 -4 0 0 +0.2
Total weighted score
G10 FX Scorecard - Contributions to total score
Currency Strategy
Currency Strategy
SEB FX EM Scorecard, Medium Term

Fundamentals Carry Monetary policy Flows Valuation Positioning Technicals Liquidity Ec. Surprise Event risk Global cycle Total weighted score Weights 20.0% 5.0% 20.0% 10.0% 15.0% 5.0% 10.0% 0.0% 10.0% 0.0% 5.0% RUB +1 +5 0 +1 0 -1 -5 -3 0 0 +1 +0.0 CNY +1 -3 +1 +2 0 -1 +3 0 +1 0 +1 +0.3
Currency Strategy
Big Picture: Growth and monetary policy drive FX outlook

In our last Currency Strategy report we outlined several themes we thought valid for Q4 2013 and early 2014. We believed Fed tapering was imminent and that it would together with the increasingly positive US growth outlook promote a return to a strong USD, particularly vs. commodity currencies. In our SEB FX Scorecard we recommended long USD, NOK, EUR, SEK and GBP vs. short JPY, AUD, NZD, CAD and CHF. Although wrong concerning Scandinavian currencies, especially vs. NZD, our basket has appreciated by almost 2% since its inception. Further, USD/JPY has also gained considerable ground (one of our other recommendations), while commodity currencies have underperformed (NZD exempted). We still expect these developments to continue at the start of this year, as we explain below. A BROKEN TREND AT LAST Last year, the FX market finally broke its post-2009 trend in which currencies of small and economically sound peripheral countries have continued to outperform. The factors behind this previous development were probably many but a few are listed below: outlook. In time, we expect this to boost FX volatilities and increase the size of FX moves, though we regard these developments as likely to occur in 2015 when some central banks stand ready to hike the policy rate. The most important FX drivers this year are economic growth (momentum) and expectations regarding central bank policy. These factors also remain the highest weighted in our SEB FX Scorecard ranking where Monetary policy and Fundamentals have a combined weight of 45%.
GLOBAL GROWTH RECOVERY BUT DIVERGENT CENTRAL BANK DEVELOPMENTS The current economic recovery is being led by the US. Our 2014 (3.3%) and 2015 (3.7%) GDP growth forecasts remain above consensus. Following an increase of 4.1% AR in the third quarter, the economy looks almost certain to expand by 3% AR in Q4. Household debt has fallen from 125% of disposable income in 2007 to 100% today, and hence the household sector is well-positioned to drive the economy forward. We also expect a substantial increase in business investment in 2014. 1) Peripheral currencies became significantly overvalued with the Aussie as a prime example, 2) In response Australia cut interest rates, while Sweden also lowered its inflation outlook substantially as a result of the krona trading at a 20 year trade weighted high; 3) Austerity effects of European fiscal policies led to a rapidly improving European current account, while foreign portfolio flows entered the Euro-zone (a process which had already begun in autumn 2012) as the OMT program lowered the regions risk premia; and 4) Growth finally rebounded in the UK and US; later the Fed also took steps to signal an imminent reduction in QE3 purchases. Given the improving G4 growth perspective and the changed stance of peripheral central banks, the FX market increasingly favoured large and liquid currencies. As stated we expect this theme to continue with low volatility and smaller FX moves. The further the economic recovery continues the more uneven (divergent) will be the respective central bank policy However, Fed monetary policy continues to be eased with QE3 set to continue for most of this year; SEB expects a fairly linear reduction (of approximately USD 10bn at each Fed meeting) in its QE3 programme. At its latest meeting in December 2013, the Fed pledged to keep rates unchanged long after its 6.5% unemployment rate threshold is hit. As a result, we do not expect this threshold to change at forthcoming meetings. The rate at which QE3 is reduced will depend on GDP and labour market data. The Fed expects 3% growth in 2014 and unemployment decreasing to 6.5% by year-end. Our own forecasts could imply a faster tapering schedule based on strong labour market developments. For the USD, we regard the monetary policy outlook as a neutral factor with an upside risk if our optimistic economic forecasts prove correct. Turning to the Euro-zone, although the outlook has clearly improved obviously economic developments lag
Currency Strategy
and are much weaker: they include further deleveraging by the public and private sectors (the banking sector continues to shrink its balance sheet ahead of important stress tests later this year) together with high unemployment, low inflation and impaired bank lending. SEB forecasts Euro-zone GDP growth of 0.8% and 1.6% in 2014 and 2015, respectively. We expect inflation to remain well short of (SEB forecasts EMU HICP to stay below 1.0% until the end of 2015) the ECB target (approximately 1.8%) and believe the ECB will probably lower its own HICP estimates at its March meeting, paving the way for a further policy response from the ECB: later this spring we expect it to announce GDPweighted (non-sterilised) bond purchases of approximately EUR 40-50bn each month.
sell the fact, i.e. we think it likely speculation surrounding the program will boost flows into Europe ahead of its launch. However, its actual adoption will represent a sign of weakness, causing the euro to be sold off after the ECB launches QE.
The question remains how will these affect the euro? The answer is not straightforward as the common currency has been driven higher by increasingly positive portfolio flows into Euro-zone bond and equity markets. Should the market continue to build expectations that the ECB will adopt a QE-program consistent with our own forecast, flows leading up to such a decision may well be euro-positive and indicated by a continued decline in Euro-zone risk premiums. Further, while balance sheet expansion by other central banks may have contributed to currency weakness, it is not obvious that QE policies lead directly to weaker exchange rates. One example is the Bank of England where Sterling bottomed out before the central bank launched QE in early 2009. Also, the BOJ ran QE policies for a very long time to no effect, except a stronger currency, until very aggressive policies were adopted in 2012, which included a higher inflation target. These were preceded by G7 coordinated JPY interventions by global central banks. In practice, the connection between expansion of the monetary base and currency weakness is therefore not straightforward. Nor is the relationship between monetary growth and inflation. Additionally, we question whether QE policies in Europe will be effective in ending current deleveraging, including decreasing bank lending and low M3 growth. We treat adoption of QE by the ECB as requiring the market to buy the rumour and
Conclusion EUR/USD: Weak growth and disinflation tendencies in Europe at the same time as the US growth situation is becoming clearer and improving more rapidly should support our long-held view that EUR/USD will weaken in coming quarters. The market has been surprised by the strong positive euro flows; we are unsure when they may ease. However, in time QE policies will highlight the EMUs large structural problems concerning high unemployment, disinflation tendencies and weak growth. While Fed monetary policy remains very loose, it will eventually tighten; indeed the bank may reduce QE3 faster than anticipated judging by our economic/labour market projections. We therefore recommend selling EUR/USD on rallies. However, depreciation of the euro will take time; near-term we expect it to remain one of the strongest currencies. In Japan, the effect of the upcoming VAT hike will be important to follow. Traditionally this type of policy has had deflationary effects in Japan. However, as the country desperately needs to strengthen its public finances it must adopt such measures. Abenomics has been partly successful and the weaker JPY has contributed to higher inflation wages however have to rise further for a sustained inflation rate towards the 2% CPI target. We expect the BOJ to seek to counteract the negative economic effects of the VAT hike by also expanding monetary policy. From a 1-3 month perspective, USD/JPY will continue to range trade between 101-106 as the speculative market is very short JPY. Also, so far longer-term portfolio flows have not turned aggressively negative for the JPY. The move towards the 2% inflation target but with the objective of keeping nominal bond yields below 1% will surely cause fixed income-related capital outflows to depreciate the JPY by a further 10% over the next 1-2 years.
Currency Strategy
Sterling has clearly benefited from the UKs stronger growth outlook. Also, unemployment has fallen rapidly towards the adopted target (7.0%) which is a precondition for higher policy rates. However, we do not expect the BOE to hike rates anytime soon: inflation is on its way down and productivity should improve with increasing GDP. Therefore, unemployment will not fall as quickly as some fear. The strongest reason for the BOE not initiating a rate hike cycle this year concerns the composition of UK growth: so far the recovery has been driven by domestic demand supported by rising asset prices. Meanwhile, growth in real wages is poor. The UK economy needs rebalancing and for that to occur a relatively weak pound is part of the policy mix. Premature rate hikes will surely work the other way around. A recovery in the Euro-zone may boost UK exports. However, this has not yet occurred. Also, after several years of stagnant growth, the economy is operating well below its neutral level. As a result, over the medium-term we look to sell GBP as the BOE trims the markets over-optimistic outlook for higher policy rates. The February Inflation Report will be the first important event and make very interesting reading. As we are more optimistic on SEK (once more) we see opportunities to sell GBP/SEK between 10.60/80 targeting the low 10s again. CAUTIOUSLY STRONGER SEK, VERY UNCERTAIN NOK OUTLOOK The Swedish krona, together with the USD, is ranked at the top of our scorecard. The currency is expected to appreciate as growth improves and the Riksbank stays firmly on hold. We expect SEK to trade more closely aligned with the business cycle. Previous strong safehaven related inflows have eased but not stopped. However, in net terms they are less important now vs. 2011-2012, which was characterized by strong inflows. As a result, we regard the breakdown in correlations between business barometers and trade-weighted krona performance as temporary. Instead, the improving outlook shown by Swedens leading indicators suggests a stronger SEK outlook. Since the Riksbank rate cut, the trade weighted krona has strengthened by almost 4%. Near-term we are slightly cautious regarding the risk of: 1) continued low inflation surprises; and 2) the risk that barometers deteriorate slightly before continuing higher (divergence currently between PMI manufacturing and NIER confidence). Also, hard economic data such as industrial production and exports have continued to disappoint. We target 8.50 in EUR/SEK by end-2014 and have recommended selling the pair at 9.00. In the long-term, Swedish monetary policy must deviate from a continued dovish ECB policy, which will certainly boost the currency. However, we do not expect any G10 central bank rate hikes in 2014, as the effects on the currency of deviating too much from still dovish G4 central bank policy will be too positive.
As regards the Norwegian krona the outlook is very uncertain. Economic growth has weakened led by disappointingly slow private consumption, while house prices are decreasing. Given the countrys wealth, highly adverse effects from substantially lower house prices are hard to identify with funds clearly available to prevent the emergence of systemic risks. Oil-related investments are also uncertain as commodity prices have moved lower. In previous years, the petroleum sector has grown strongly and hence these are treated as a risk. However, market prices currently discount a fairly high 20-30% probability that Norges Bank will lower rates in March. Still, we do not believe a rate cut is likely.
Since 2006 foreign banks have accumulated significant NOK assets, as shown in the chart below. As the outlook is most uncertain we cannot rule out continued selling of the Norwegian krona. We rank the currency just below the G10 average in the SEB FX Scorecard and remain bearish on NOK/SEK targeting 1.00 by end-2014. Finally, commodity currencies have weakened although their development has been most uneven. We are bullish USD/CAD and have recommended longs as a top trade for 2014 (we target 1.12/1.16). CAD is judged weak on most of our ranking factors, though over time the outlook should improve as the overvalued currency weakens and US growth accelerates. AUD has depreciated more than
Currency Strategy
any other G10 currency except the JPY in the past 12 months, due to poor terms of trade developments and an aggressive RBA verbally intervening to lower the value of AUD. With the currency now close to our long-term fair value (0.87), we expect only moderate depreciation vs. the USD going forward. NZD has at last been much stronger than we expected, since growth has exceeded most forecasts as a result of improving terms of trade and construction related rebuilding following the 2011 earthquake. RBNZ has a tightening bias but cannot deliver what the market has already discounted (three rate hikes) because the currency will strengthen too much. Going forward, for our forecast (weaker NZD) to be proved correct, we need to see the RBNZ ease its hiking stance should its macro-prudential tool prove effective in curbing domestic credit growth and house price developments. In time, New Zealand needs a weaker exchange rate; its currency is 20-25% overvalued according to our internal valutation models. SEB FX SCORECARD PERFORMANCE SINCE SEPTEMBER 2013. Despite a difficult period following its introduction in May this year, our FX Scorecard portfolio has generated a positive return since our last Currency Strategy publication in September. The SEB FX Scorecard total return index, which tracks suggested currency baskets, has generated a 4.8% profit since Sep 10.
The largest positive contribution to total performance since the September publication was attributable to short exposures in JPY, AUD and CAD. Conversely, the most significant losses were due to a short exposure in NZD, which has not performed despite its overvaluation, and the USD, which has failed to strengthen as we expected. After performing strongly since September 2013, the FX Scorecard index is now almost unchanged since its introduction in May 2013. For the full period its positive return reflects our view on the JPY and CAD, and our success in capturing sharp swings in GBP. IN contrast the negative return is mostly attributable to a long AUD exposure in May when the currency fell sharply, due to a surprisingly soft central bank and uncertainty regarding Chinese growth prospects. Moreover our core positive view on the NOK in 2013 was wrong as Norwegian growth prospects have disappointed, and because Norges Bank at last achieved its objective to weaken the currency. Finally, our core positive view on the USD has failed to materialize in the way we expected. NEXT FX MARKET REGIME? MONETARY POLICY EXPECTATIONS REGIME TO PROMOTE A CARRY MARKET IN 2015? In mid-2012 several developments occurred simultaneously, which proved very important for the FX market. In July 2012 the ECB launched its OMT programme to convince financial markets that the ECB would save the euro. Moreover, the Fed initiated the first stage of QE3, which further increased global liquidity. At the same time, there were growing signs that the BOJ would adopt a more aggressive monetary policy as a cornerstone of Abenomics to break once and for all the countrys devastating price-deflation trend. Several smaller currencies had also become overvalued, due to increasing risk appetite, strong economic fundamentals and a less dovish monetary policy. At this juncture several of these currencies smaller central banks began to respond through verbal or de facto interventions and by lowering rates to prevent continuing currency appreciation, which undermined their competitiveness. Since then, monetary policy expectations became the key FX market driver, with currencies backed by more neutral or even hawkish central banks receiving support while those with dovish central banks depreciated. This is where we stand today. Monetary policy appears to remain the key driver for FX markets and exchange rates fluctuate with market expectations on monetary policy. As a result, currencies are supported when these expectations become more hawkish but weaken when they become more dovish, a situation which also involves concentrating more on growth and inflation. Given its major focus on monetary policy expectations and because the general global trend still indicates even easier near-term monetary policy from major central banks including the BOJ and ECB, the current regime looks likely to persist for some time yet.
Contribution to portfolio performance

May 2013 to Jan 2014
2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% USD EUR JPY GBP CAD AUD NZD CHF SEK NOK
Currency Strategy
Consequently, increasing rate differentials will once again (eventually) improve the return on carry exposures just as they did 10 years ago. However, to produce a new carry regime, FX volatilities must be low enough to avoid eliminating the return from rate differentials. Although FX volatilities have fallen substantially in recent years, seemingly to around pre-financial crisis levels small rate differentials still makes the carry strategy unattractive. The chart below shows the carry between the most liquid currencies and the JPY adjusted for FX volatility. Currently none of the currencies can generate a risk-adjusted return above 0.25% which roughly is the lower bound to make this sort of strategy profitable. Of course, it is difficult to state exactly when the FX market will become subject to another regime or what the key currency driver might be under it. However, the present situation is likely to persist until at least one or several major central banks start to signal a tighter monetary policy. Given current very low general inflation, due to pressure from global deleveraging, this appears unlikely to occur before 2015. Provided major central banks continue to ease monetary policy, they will probably also stop their smaller peers from taking steps to tighten theirs, as this would mostly subject their own currencies to further pressure to appreciate. Therefore, the trigger for the next currency regime will probably concern Fed monetary policy and involve a complete cessation of asset purchases and signalling of higher rates, a situation which would also make it possible for smaller central banks to begin tightening monetary policy as well. So what will the next regime be like? Naturally, answering this question requires considerable speculation. However, as we expect the current regime to continue until the Fed, or another large central bank, announces a more hawkish monetary policy, this will also cause rate differentials between currencies to widen. Moreover, several central banks (such as the BOJ and ECB) will probably remain on hold for longer, due to the particular conditions prevailing in their respective regions.
Therefore, although FX volatilities have declined sharply since the financial crisis and currently are close to precrisis levels it is not enough to trigger the emergence of a new carry regime due to current rate differentials. On this basis therefore, it suggests that a new carry regime will be established the day central banks start considering monetary policy tightening, which probably will be a theme for 2015 at the earliest. Until then the current regime will likely be in place.
Currency Strategy
US dollar
According to the BOE trade weighted USD index, the Greenback appreciated by almost 3% last year. Nevertheless, it fell short of the euro and sterling, which were even stronger. With the Fed now slowly reducing QE, while the ECB in contrast may need to introduce additional measures, divergent monetary policy should support our more positive view on the USD this year. ECONOMIC FUNDAMENTALS Given that last years fiscal policy contraction reduced economic growth by almost 2% the underlying growth rate was surprisingly strong with the economy expanding by around 1.7% in 2013. This year the negative impact of fiscal policy will be substantially smaller. Moreover households appear to have completed deleveraging, while rising equity and house prices have boosted household wealth. As more people are hired the contribution to growth from household spending is likely to accelerate. In addition capital spending remains at historically low levels. However, as political uncertainty is substantially less following the budget deal in December 2013 businesses may consider it more attractive to expand their investments in response to stronger demand this year. Growth of almost 3.5% in 2014 is likely to support the USD this year. +3 MONETARY POLICY In December the Fed took the first step to wind down its bond purchases of USD 85bn, which have been taking place since the end of 2012. It will continue to lower them steadily this year based on the outlook for the economy in general and the labour market in particular. We expect the Fed to reduce bond purchases by USD 10bn at every meeting going forward provided that the economy creates sufficient jobs to further reduce unemployment. As a result, they will probably end sometime late this year. As long as the Fed continues to create money to purchase assets it must be considered to be easing monetary policy, which should prevent currency strengthening. Therefore, from a currency perspective monetary policy is unlikely to provide any support and could at best be regarded as neutral for the dollar over the next 3-6 months. 0 FLOWS Prior to the financial crisis in 2008 stronger US growth and in particular growth dominated by household spending generated a growing current account deficit. Weak economic activity during the recession and increased savings by households and businesses produced a cyclical improvement in the deficit and reduced US dependence on foreign savings. Although stronger US growth may cause the deficit to widen again going forward, increasing domestic oil production will have a positive impact on external trade which should partly offset these effects. Further, rising US yields and stronger US growth should suffice to attract financial inflows from abroad going forward. Therefore, although the flow situation probably is negative overall for the USD it gets closer to neutral. -1
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
S peculative positions
04 05 06 07
-2 5
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.
10
Contracts (thousands)
E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0
12 5
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 and still is. It appears the general dollar depreciation coincided with the introduction of the euro in 2002. The euro then earned the reputations as an alternative global reserve currency, triggering structural rebalancing flows out of the USD. However uncertainties related to the euro and the yen, and superior US growth outlook should eventually trigger a recovery for the USD. Our internal valuation model, as well as the real effective exchange rate, indicate the USD remains undervalued. 0 POSITIONING The net positioning among speculative accounts is net long the USD, indicating a belief it will appreciate. In a two-year perspective, the net long position is longer than average but not at levels associated with normalization. Following Feds decision not to taper QE in September, a net long USD positioning was neutralized. In November when the budget ordeal in the US was solved and when data started to indicate a higher probability of December tapering, a net long USD position has been built once again. End of December and early January this has continued but the rate of change has been low, rendering a neutral score. 0 TECHNICALS There is possibly a bullish medium-term wave structure unfolding, but this scenario needs extension beyond 82.17-82.67 for confirmation. An extension above 81.50 would boost a positive grade while a (less likely) move below 79.68 would indicate that a penned advance is incorrect or at least premature. +2 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE With its superior liquidity the USD traditionally has been 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. Nevertheless should some unexpected event arise and hurt risk appetite we would prefer to be long the USD irrespective of its weak correlation with risk appetite. This far divergent monetary policy has failed to render the expected support for the USD as US interest rates have stayed very close to the German counterparts. However, going forward widening rate differentials between US and the euro area should support the USD, but it probably takes further steps by the Fed for that to occur.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: USD INDEX

Weekly Q=USD
2013-02-01 - 2014-02-21 (STO) Price
161,8% 83,71
84,00 83,00
100,0% 82,17
82,00 81,43 81,00 80,95 80,00 79,00

.12
m a m j Q1 2013 Q2 2013
a s Q3 2013
n d Q4 2013
f Q1 14
11
12 5
Currency Strategy
The Euro
In 2013, the strength of the euro surprised, moving upward as crisis fears eased, budget deficits decreased, external surpluses rose and institutional reforms progressed. Measures taken by the ECB did little to harm the currency. With the euro area expected to continue to emerge from the crisis in coming months, markets may retain a positive view on the euro. However, most positive news appears to be already discounted. Impatience regarding the slow progress being made in leaving the crisis behind could resurface again. Further, several of the ECBs quantitative easing measures and the judgement of the German High Court on the ECBs OMT program may potentially weigh on the euro. ECONOMIC FUNDAMENTALS Survey based leading economic indicators suggest that the economy continued to grow in Q4 2013. Looking ahead, the recovery is likely to remain lacklustre in 2014 with a risk of deflation. More positively, the Euro-zone is emerging from its crisis. Still, growth will remain too weak either to make any significant inroads into unemployment or restore public finances to a more sustainable condition. Furthermore, decisions taken on banking union rules indicate that further necessary economic adjustments must take place through austerity and price deflation in peripheral states. Polls on the possible outcome of EU parliamentary elections in May suggest anti-European parties may gain at least one third of the votes. Such signals may also cause politicians to delay implementation of further structural reforms. Nevertheless, with growth an important component of any consideration of fundamentals, the euro has a small positive weight, due to the weak but improving GDP outlook. +1 MONETARY POLICY The ECB kept its policy rates at record lows in January and intends to leave them there for a long time, or even reduce them further. We expect the central bank to introduce quantitative easing measures in March to limit downside risks to inflation and to lend more support to the euro area recovery. A massive injection of monetary liquidity could exert further downside pressure on the currency. The upcoming ruling of the German High Court on the ECBs OMT program could limit the banks ability to honour its promise to do whatever it takes to save the euro. -1 FLOWS In the 12-months to end-October 2013, the cumulated seasonally adjusted current account posted a surplus of 2.2% of GDP, well above 1.2% in December 2012. This upward trend is likely to continue in coming months, still strongly supporting the currency. Combined direct and portfolio flows reported cumulated net inflows of EUR 5bn in the 12-months to October 2013. Overall the flow picture remains supportive for the euro. +2
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
12
12 5
Currency Strategy
The Euro
VALUATION Very few today believe in a break-up of the currency and the break-up risk premium attached to the euro has been significantly reduced. With increased stability the low valuation of financial assets and high yields have attracted foreign inflows. Hence, although the USD has strengthened in recent months the euro has outperformed it. From previously being considered slightly undervalued the euro today instead appears somewhat expensive compared to its long-term fair value. Obviously competitiveness is very diverse among euro zone members. German exporters could most likely tolerate EUR/USD at 1.40 or higher whilst the GIIPScountries and France would favour a weaker euro in order to restore competitiveness. A correction towards its longterm fair value is only likely to happen on the back of general dollar strength. -1 POSITIONING In November and December speculators began building a net long position in EUR. The size is still quite modest but given that a net short position has been the norm during the past three years (especially 2011 and 2012) this is a sign of growing EUR confidence. In the most recent weekly report on positioning the net long position was reduced, providing a negative slope score but not enough to generate a negative overall positioning score. 0 TECHNICALS The yearly average is still rising and the EUR index remains above it. But the advance throughout 2013 was remarkably slow and lacklustre, forming a trend-ending Wedge. If breaking dynamic support at 110/109 a setback all the way down to the base of the Wedge at 105.15 could be pencilled in. +1 LIQUIDITY, EVENT RISKS, GLOBAL CYCLE. In coming months we see mainly two event risks. Both the upcoming ruling of the German High Court on the ECBs OMT program as well as the election to the EU parliament in May have the potential to weigh on the euro. As regards liquidity, the rising optimism about the outlook for the economy supports capital inflows into euro area financial instruments, in particular equities. Furthermore, the ongoing deleveraging in the European financial industry leaves overall financing needs contained in coming months.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: ECB EUR index

Weekly Q=EUR
2012-07-06 - 2014-03-28 (STO) Price
110,84 110,00 108,98 108,00
106,00 104,00 102,00 100,00 98,00

.12
Q3
Q4 2012
Q1
Q2
Q3 2013
Q4
Q1 2014
13
12 5
Currency Strategy
Japanese Yen
The Japanese currency was the weakest of the G10currencies in Q4 2013. This year has begun with more moderate risk appetite. Indeed, the weak US non-farm payroll report on Jan 10 initiated some profit-taking on a crowded long USD/JPY position. The long-term outlook a weaker JPY is intact. Following a brief period of rangetrading in USD/JPY 101-106 as some excessively short speculative positions are liquidated, we expect depreciation to resume targeting 110 by year-end. ECONOMIC FUNDAMENTALS The economy continues to improve as Abenomics generates short-term positive outcomes: GDP Q3 2013 increased 2.4% q/q AR after rising 2.6% y/y in Q2. SEB expects GDP growth of 1.7% in 2014 and 1.3% in 2015, respectively. Meanwhile, CPI (excluding fresh food) rose by 1.2% y/y in Dec, its fastest rate since 2008. Therefore, PM Abe looks set to deliver on his two first arrows (monetary and fiscal expansion) included in the economic plan to achieve the newly adopted 2% inflation target. Much remains to be implemented regarding the third leg, economic restructuring. In April VAT will rise from 5% to 8%, the economic outcome of which is uncertain, especially for inflation as previous VAT hikes have pushed Japan back into deflation. Strengthening public finances must be a priority going forward. We expect the VAT hike to be JPY negative as the BOJ will seek to counteract the negative economic effects by additional monetary expansion. +1 MONETARY POLICY BoJ governor Kuroda has implemented a triple 2 monetary policy by targeting 2% inflation within 2 years and doubling (2x) the monetary base to exit deflation, which has crippled the economy for almost 15 years. Growth in monetary base is nearly 46% y/y (currently JPY 200trn) working its way towards the BOJ adopted target of 270 trn (roughly 50%/GDP). Going forward, this target is likely to be raised as the negative effects of fiscal austerity impact. The BoJ will probably make QE open-ended and remove its 2-year target. -2 FLOWS Underlying current account developments are clearly negative for the JPY (growing trade deficit). Although unlikely to produce an overall deficit soon (as net investment income will continue to generate substantial net inflows) the risk of moving towards a dependence on external capital will increase as domestic investors send capital abroad. In early 2013, the outflow was concentrated on speculative flows (other investments). Domestic investors have not sent money abroad through bond or equity purchases. They have delayed as a result of recent turmoil in emerging market bond markets and selling in US Treasuries fearing tighter US monetary policy. Despite likely intermittent JPY weakness due to smaller speculative flows, nonspeculative bond and equity flows must become outflows if we are to see sustained weakness in the JPY. Eventually this development will happen given the adopted 2% inflation target in combination with a need to keep nominal bond yields at record low levels. 0
14
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
4 3 2 1 0 -1 -2 -3 96 97 98 99 00
JP CPI ex fresh foods YoY %
01
02
03
04
05
06
07
08
09
10
11
12
12 5
13
Currency Strategy
Japanese yen
VALUATION The rapid depreciation since Q4 2012 has moved JPY valuation into neutral territory. Our own SEBEER model actually indicates the JPY is somewhat undervalued in trade weighted terms. Similarly the deviation from long-term nominal trend now signals a substantial undervaluation whilst the real effective exchange rate trend is close to current spot level. Our best estimate for JPY valuation is that the currency is around fair value but is that really fair considering current BOJ monetary policy? +1 POSITIONING Speculative accounts are massively JPY net short. In the final week of 2013 positioning was most net short since the end of the carry trade era in 2007. In the latest weekly report the net short begun to normalize and further normalization is expected over the coming weeks, which is reflected in the positive JPY score. +3 TECHNICALS The yen remains on a negative track and it is trading well below the negatively sloped yearly average. But from an Elliott wave perspective the wave-5 low may be in place, why the negative score for the currency is taken down to a modest -2. Should the correction higher kick in now, a correctional target would be fair at the yearly average, now at 145, or even at the high in wave-4 at 150. -2 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE The speculative part of the FX market is heavily short the Japanese JPY. This is a prime risk as long USD/JPY has developed into a large (but working) consensus bet. The long USD/JPY bet has been initiated for two good reasons: 1) Fed will continue to tighten monetary policy leading (taper Qe3 to start with) to increasing interest rate differentials between USA and Japan. This will attract flows from Japan to the US. 2) We expect BOJ to expand momentary policy further as the upcoming increase in VAT in April will work to cool the economy. Disappointments on either of these factors will surely promote some profit taking on long USD/JPY. We regard levels towards 100-102 as attractive for reinstating such position.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: BOE JPY index

Weekly QJPYBOEEER=
2011-09-30 - 2014-04-11 (STO) Price
190,00 180,00 170,00
1
160,00
3 5
Q4 Q1 2011 Q2 Q3 Q4 2012 Q1 Q2 Q3 Q4 2013
150,00 144,48 140,00 134,80 130,00

.12
Q1 Q2 2014
15
12 5
Currency Strategy
British pound sterling

Despite a very poor start last year the GBP was one of the strongest currencies in 2013. It was supported by a stronger and more persistent growth recovery, which also fed premature expectations that BOE monetary policy will be tightened this year. However, current growth can hardly be maintained. Weaker growth should produce more dovish expectations on the BOE, weighing on the currency. ECONOMIC FUNDAMENTALS The UKs continued economic recovery last year took us by surprise. While it is hardly unexpected that the economy should bounce after several years of sub-trend growth, it should have slowed by now. However, the forces currently supporting it are the same as those that caused its problems in 2007/08. Low interest rates combined with government programs to ease household credit conditions have kickstarted the housing market ending years of deleveraging. Consequently, despite weak earnings growth household consumption is supporting domestic demand, which for instance was illustrated by record strong growth in retail sales in December (6.1% y/y). However, even before the financial crisis in 2008 the governor of the BOE emphasized the importance of a structural shift in growth drivers away from domestic consumption towards exports and investments. So far, this has not occurred. Near-term there is a risk that growth will underpin further GBP-strength, but there will certainly be periods of weakness as no recovery is linear. +3 MONETARY POLICY In August the BOE (under its new governor) introduced forward guidance to increase the credibility and predictability of monetary policy and prevent bond yields from rising. By linking monetary policy with the unemployment rate as a proxy for the amount of spare capacity in the economy, the BOE hoped to convince markets that tightening monetary policy is a long way off. However, investors remain unconvinced. Expectations on policy tightening have been brought forward, due to stronger growth and lower unemployment. Currently market pricing reflects a full rate hike in Q4 this year, which we and the BOE believe is too soon. Stronger growth is likely to improve productivity and slow the improvement in unemployment. Eventually a re-pricing of current monetary policy expectations will negatively impact the pound. -2 FLOWS The current account deficit has failed to improve despite several years of currency depreciation and deleveraging by UK households. Perhaps this is partly due to weak demand in some of the UKs core European export markets, although we think it reflects structural problems with the British economy, which must eventually be resolved. For now outflows related to trade and net investment income are being offset by financial inflows. However, weaker growth may once again undermine the attractiveness of UK financial assets, in which case, imbalances may weaken the currency. -1
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
16
12 5
Currency Strategy
British Pound Sterling

VALUATION After depreciating substantially in 2007/08 the GBP reached undervalued levels. Since then a combination of falling long-term fair value and, to some extent, a rebound in the nominal GBP-index, have moved the currency towards its estimated long-term fair value. We do not expect valuation in itself to trigger a move in the GBP from current levels. 0 POSITIONING Speculators are the most bullish positioned since early 2013. However this is not enough for a negative mean reversion score since there were three occasions in 2012 when speculators where net longer GBP. In the latest COT report on positioning, speculators had begun to scale down their net long position which neutralized an otherwise positive trend score. 0 TECHNICALS: The move higher shows that demand persisted into yearend and beyond. This renders a positive grade for the pound but the move shows a tendency to create a Wedge which indicates loss of momentum. The distance to the yearly average also indicates a stretch which bodes for at least some kind of correction lower. Should this correction unfold as thought, and break below support in the high-83s, extension should be pencilled in towards the next support and the current level of the yearly average near 82. +2 EVENT RISK, LIQUIDITY AND GLOBAL CYCLE Traditionally changes in the sterling exchange rate have been almost uncorrelated with global risk sentiment and that still seems to be the case. Large financial markets and the tradition as a reserve currency make the GBP among the most liquid currencies in the world. As such it tends to be almost unaffected when financial markets focus on liquidity. In 2013 the UK economy recovered markedly after years with weak growth. Despite higher forecasts the economy has continued to surprise on the positive side supporting the currency. Moreover a sharper than expected drop in unemployment to 7.4% in November has had implications for BOE expectations. According to current pricing the BOE is currently expected to lift the rate already in 2014, which we think is too optimistic. Hence currently the biggest risk related to the GBP is a growth related disappointment feeding into more dovish expectations on monetary policy, which for sure will weigh on the GBP.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: BOE GBP index

Weekly Q=GBP
2012-04-27 - 2014-03-21 (STO) Price
82,00 81,69 81,00 80,00 79,00 78,00

.12
Q3
Q4 2012
Q1
Q2
Q3 2013
Q4
Q1 2014
17
12 5
85,00 84,00 83,00
Currency Strategy
Canadian Dollar
The Canadian dollar is one of the lowest scored in this report. Negative factors include technicals, economic surprises and flows. Previously positive, monetary policy is now neutral as the BOC has abandoned its previously hawkish bias housing price developments/domestic credit growth have slowed while the focus has now switched to low inflation/growth and still weak Canadian exports. ECONOMIC FUNDAMENTALS Economic growth rebounded to 2.7% AR in Q3 from 1.7% in Q2. Domestic household consumption remained the key contributor while net trade still contributed negatively. So far, the transition towards export generated economic growth, which the BOC wants and expects, has not materialized. Weak external competitiveness due to an overvalued CAD has improved as dovish monetary policy expectations have contributed to significant CAD depreciation. We recommend closely monitoring business investment contributions to US GDP (weak so far). A BOC study found this particular factor has a major impact on the Canadian GDP outlook. SEB expects stronger US investments, which in time should also improve prospects for Canada. +1 MONETARY POLICY The BOC has kept its policy rate on hold at 1% since September 2010. In its October policy statement it finally dropped its hawkish forward guidance in favour of a neutral stance. Since October inflation has continued to surprise on the downside Nov (0.7%) and Dec (0.9%). With inflation persistently below its 2% target, the BOC now attaches increasing significance to downside risks to inflation. As expected, its new governor, Stephen Poloz, has proved more exportoriented than his predecessor Mark Carney who focused more on household imbalances. In a speech, Poloz has indicated that the BOC stands ready to cut the rate if data remain weak. However, current and on-going CAD depreciation will probably reassure the BOC sufficiently to enable it to leave its policy rate unchanged for now.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Considering that current pricing indicates a small probability for a rate cut which we dont think will materialize we view monetary policy as a small positive for the CAD. +1
FLOWS Weak competitiveness continues to produce trade deficits where the November deficit turned out nine times as large as expected (at -0.9bn). While they have been partly offset by foreign portfolio bond inflows, these have decreased as the Euro-zone recession comes to an end. Foreign portfolio flows in November increased to 8.7bn from 4.4bn in October though the long-term trend is negative. On the positive side, the inflows has not turned as some were worried that they would do in 2013 and especially after June data showed a record large outflow in bonds. The current account deficit of around 3% of GDP remains CAD negative. -1
18
12 5
Currency Strategy
Canadian dollar
VALUATION In trade weighted terms the Canadian dollar belongs among those currencies being considered overvalued from a long-term perspective. Although the loonie has weakened lately our internal long-term fair value model indicates the CAD remains around 5% overvalued against its trade weighted index, and the BIS real effective exchange rate gives a similar picture. Hence, valuation is unlikely to stop the currency from further weakness. With signs that previously supportive capital inflows have evaporated it may continue its correction towards a more reasonable valuation. However considering the long-term trend in a nominal trade weighted index recent currency weakness has reached extremes and further depreciation may be a lot slower. 0 POSITIONING A large net long CAD position was gradually turned into a net short position during the period from September 2012 to April 2013. During MayOctober, this process normalized. In October BOC dropped its hawkish forward guidance and since then speculators have been adding to their net short position again. During the recent weeks, the net short position has stabilized. A stable position renders no negative score and as even if the net short position is substantial, it is not any more pronounced than just before Bernanke began the tapering talks in May and thus normalization is not expected yet. 0 TECHNICALS The recent paced drop shows acceleration as the index was allowed to cut below earlier support near the 106-level. The 2010-2013 Round-top formation actually holds an ambitious theoretical 93.40 objective. But in the short-term, conditions have become a little overstretched and a small recoil to recheck mentioned support (now acting as resistance) would come in handy as a selling opportunity. An extension below 103 would place the CAD in a void with no real supports until 97.50/96.00 which then could be tested. -5 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, appreciating with improving risk appetite. However since last year this relationship has broken down. On the other hand with rapidly increased US production of crude oil and shale gas Canadian exports may suffer. With its tight connection to the US economy one would traditionally expect the Canadian economy to improve on the back of a more benign outlook for US growth. However, a study by the BOC indicates that primarily this relationship is related to growth in US capital spending, which so far has failed to pick up. Therefore, should US capital spending start to improve this year it may benefit the Canadian economy and its currency.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: BOE CAD index

Weekly QCADBOEEER=
2008-07-18 - 2014-08-01 (STO) Price
115,00 110,26 110,00

50,0% 105,55 100,0% 103,70 50,0% 103,10
105,00 104,40 100,00
161,8% 96,10 100,0% 93,41
95,00 90,00
.12
2009 2000
2010
2011
2012 2013 2010
2014
19
12 5
Currency Strategy
Australian Dollar
Since April 2013 the AUD has depreciated by approximately 17% against the USD to trade currently around 0.88. While this was triggered by changed expectations on monetary policy and weaker Chinese growth, Fed tapering fears have also contributed to a weaker AUD. The central bank governor has told he thinks the fair value for AUD/USD is around 0.85 and we agree. ECONOMIC FUNDAMENTALS The Australian economy has been growing slightly below trend for the past year. Household spending remains cautious while business investments outside the mining industry have shown signs of increasing following weakness last year. Still, investment intentions have not improved significantly with mining related investments probably set to fall even further. Retail sales growth has risen but remains well below rates seen before the 2008 financial crisis. The labour market is still soft with growing unemployment now back at previous 2009 highs and labour participation falling. However, increasing hours worked suggests labour demand is improving. +2 MONETARY POLICY Last year, the RBA lowered its cash rate twice to 2.50%, further reducing the positive rate gap against other central banks. Evidence suggests the Australian economy has reacted positively to the policy change. House prices have begun to rise; in Q3 prices of established houses were almost 8% higher than a year ago. Consequently, housing credit growth is improving once again. The RBAs decision to cut the cash rate in Q1 was probably due to low inflation, the AUDs high valuation and deteriorating terms-of-trade attributable to lower commodity prices. Wage pressure has remained weak and there are very few signs of increasing cost pressure and inflation. We therefore believe the RBA will remain on hold for the foreseeable future to support the economy and prevent the currency from appreciating. The RBA governor has stated he believes the AUD/USD to be fairly valued at around 0.85. However, as this view is currently reflected in market pricing we regard monetary policy as neutral for the AUD. 0
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
FLOWS Capital inflows have been supportive for the

Australian currency for several years. A combination of strong fundamentals and an above average yield have attracted bond-related inflows while capital spending by the mining industry has generated large FDI inflows. However, falling interest rates after rate cuts from the RBA, Fed tapering and lower capital spending on commodities have eroded these positive flows. As always Australia suffers from a persistent current account deficit, which makes the currency vulnerable when financial flows are reduced. 0
20
12 5
Currency Strategy
Australian dollar
VALUATION The combination of strong fundamentals, high commodity prices and interest rates above average kept the AUD well above its long-term fair value for years as Australia attracted large capital inflows. However, lower commodity prices have depressed terms of trade significantly from its highs. Moreover mining related investments appears to have peaked and weaker domestic demand has triggered several rate cuts from the central bank to support the economy. Altogether weaker growth, falling national income and a lower rate advantage eventually undermined the stretched valuation of the AUD. The correction has pushed the valuation towards our estimated long-term fair value. The RBA-governor has been rather explicit about his view on the fair value in AUD/USD, which he sees around 0.85. However, valuation in itself is unlikely to serve as driver for the AUD going forward. 0 POSITIONING Speculators positioning in the AUD tumbled in 2013 from a net long to a net short position. Since data began pointing toward December tapering by the Fed, the net shorts have been added to. The position increase has been steady. 0 TECHNICALS The decline from last years high looks like unfinished business. If repeating that move (quite common behavior) the ongoing second leg lower would match a 2008-2013 50% retracement near the 88-level. In the short-term the move has distanced the now declining yearly average by a little too much, but medium-term shorts should see through the danger of a short-term correction. A move back over resistance at 105.90-106.60 would complicate the outlook and reduce the negative grade. -4 EVENT RISK, LIQUIDITY AND GLOBAL CYCLE In terms of valuation the AUD has moved close to its long-term fair value after domestic growth slowed and the central bank continued to ease monetary policy. Previously the high valuation of the currency was accepted by the central bank as terms of trade reached historically high levels. However, falling commodity prices have reduced terms of trade, which has dragged the currency lower. Despite being closer to a more reasonable valuation the AUD remains an example of currencies that will suffer if the USD appreciates on the back of further tapering by the Fed. On the other hand it would have the potential to appreciate if the Chinese economy improves and commodity prices would start to rise improving Australian terms of trade.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: BOE AUD INDEX

Weekly QAUDBOEEER=
2008-07-18 - 2014-08-01 (STO)
Price
115,00 110,00 106,41 105,00 100,00 98,40 95,00

100,0% 87,90
50,0% 93,75 61,8% 88,19
90,00 85,00 80,00 75,00

.12
2009 2000
2010
2011
2012 2013 2010
2014
21
12 5
Currency Strategy
New Zealand dollar

The New Zealand economy continues to strengthen with growth having acquired considerable momentum. Domestic demand is supported by low interest rates, increased construction activity, high export commodity prices and rapid house price inflation. RBNZ has two major opposing concerns; high house price inflation and the strong New Zealand dollar. However, the bank has stated that current monetary stimulus is becoming unnecessary. ECONOMIC FUNDAMENTALS Q3 2013 GDP rose by 1.4% q/q, 3.5% y/y, which was stronger than the market expected. RBNZ forecast growth of around 3% until early 2015 after which it will moderate. PMI manufacturing at 56.7 points at an upbeat expansion (all sub-indices and all regions) while terms of trade stands at a 40-year high, driven by rising export commodity prices, especially for dairy products, which are projected to remain firm or even increase over the next year, according to Fonterra. Unemployment, currently at 6.2% is projected to decline towards 5.7%. The construction sector is strong with the post-earthquake reconstruction in Canterbury and housing boom influenced by net inward migration and low interest rates. Inflationary pressure is starting to build as the economy strengthens with annual CPI increasing to 1.4% in Q3, still inside the banks target zone (1-3%). The central bank imposed restrictions on high loan-tovalue (LVR) mortgage lending in October 2013 to reduce annual house price inflation. The first evaluation will take place in March. +3 MONETARY POLICY RBNZ has left its policy rate on hold at 2.50% since March 2011. The bank is struggling to dampen high house price inflation: an LVR restriction was introduced in October to help curb credit growth. Also problematic is the high exchange rate (20-25% overvalued) which the bank regards as unsustainable in the long run. In its December monetary policy statement it said it will increase the OCR as needed to keep inflation near 2%. With robust GDP growth and inflation moving towards the midrange of the banks comfort zone it may need to tighten monetary policy (current policy rate: 2.5%). However, the market also discounts three rate hikes (3*25bps) for 2014, which might be too aggressive taking into the account the elevated level of the currency. Monetary policy is therefore neutral. 0 FLOWS The current account deficit increased in Q3 to a post-2008 high (4.1%/GDP Q3 2013, RBNZ forecasts 3.9%/GDP 2014). Foreign holdings of NZ government debt however again rose (Nov 63.5%) after having been trimmed down from 66% last summer. Financial inflows from the Canterbury earthquake insurance settlement claims will still have a positive impact but (with 2/3 settled by end-September) are expected to become less important after Q1. -2
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
22
12 5
Currency Strategy
New Zealand dollar

VALUATION For a long time we have argued that the NZD is overvalued and poised to correct lower. Although the New Zealand central bank (RBNZ) is concerned for the long-term effects of an expensive currency, they consider rate changes an inappropriate way to target the exchange rate. Instead the RBNZ occasionally has intervened in the FX market to prevent the currency from appreciating further. According to our long-term fair value model, the NZD trade weighted index is 20-25% overvalued against our long-term estimate. Just as the AUD and the JPY previously have corrected toward their fair values, the NZD will eventually also correct towards a more reasonable valuation. However it will probably not happen just yet as rising house prices and a strong economy have increased expectations that the RBNZ will be among the first central banks to hike rates, which we doubt. -5 POSITIONING Despite the strong surge since summer, speculative accounts this time have been much more reluctant to rebuild longs (not even close to the extent, seen before the April June decline). With the picture relatively rosy for the NZD, the market might actually realize that it risks missing a buying opportunity. +1 TECHNICALS The BOE NZD index currently stands at record levels. The strong surge from the June low point has fully repaired the losses incurred last spring. Underpinned also by the rising yearly (52w) moving average, there seems to be little preventing the currency from continuing higher, at least in the short & mediumterm. A possible price target would be 127, which is the point where the 2000 - 2007 advance and the 2009 2013 will be equal, a common relationship. +1 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE Continued growth in the US and in Asia will likely continue to underpin NZ export. China has now passed Australia as the number one export destination (dairy and lumber are two main export products). Terms of trade will continue to improve as the price of especially dairy products will remain at elevated levels whereas especially important energy is likely to fall. Rising import volumes have however widened the C/A deficit during the last quarter. With global risk appetite seen rising, event risks should be declining. Macro prudential measures to curb the house price inflation have been implemented but those have been in effect for a too short period of time to tell the impact (the measure is seen as equivalent to a 30 bps OCR hike). Rising interest in investing in NZ government debt and the relatively high level of interest rate has pushed the currency higher since last summer. The elevated level of the currency is the main reason for the RBNZ having not hiked the OCR and why they will remain reluctant to do so. All in-all the risks attached to the NZ economy seems to be well contained.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: BOE NZD index

Price 120 115 110 105
12 5
100
95 90 85 80 75
2002
2004
2006
2008
2010
2012
2014
2000
2010
23
Currency Strategy
Swiss Franc
Upward pressures on the Swiss franc are abating but slowly, despite many months of declining risk premia in the Euro-zone. At current levels it is still highly valued although significantly less than previously given the continued low Swiss inflation. We therefore expect the SNB to remain ready to defend the minimum exchange rate with the outmost determination. If our main scenario of a slow but steady stabilisation in the euro area proves correct, the CHF has room to weaken. ECONOMIC FUNDAMENTALS In Q3 2013 the Swiss economy continued to expand, growing 0.5% q/q. The increase was broad-based with domestic consumption, gross capital spending and net exports contributing positively. Indeed, headwinds affecting Swiss exporters due to the strong currency appear to be gradually receding. We forecast GDP growth to increase from 1.9% in 2013 to 2.3% in 2014 and 2.7% in 2015. This should help reduce the unemployment rate from 3.2% in 2013 to 2.8% by the end of 2015. In such a favourable environment, public budgets should remain balanced. Solid economic fundamentals continue to support the Swiss francs safe-haven status. +1 MONETARY POLICY The SNB maintained its monetary policy stance at its December 2013 meeting. The target range for the 3m libor remained unchanged at 0.000.25% and the minimum EUR/CHF exchange rate at 1.20. The central bank forecasts inflation rates of 0.2% and 0.6% for 2014 and 2015, respectively, indicating there are no upside risks to inflation in the medium-term. It expects the Swiss economy to grow by around 2% this year with downside risks to the outlook prevailing. Consequently, we believe the SNB will keep its monetary policy stance unchanged in 2014. If necessary, the bank will continue to defend the minimum exchange rate with determination. As long as EUR/CHF trades above the 1.20-floor monetary policy must be considered neutral. However, on the back of a renewed appreciation pressure on the franc taking it close to 1.20, it would turn massively negative. 0 FLOWS In the first three quarters of 2013, the Swiss current account reported a surplus of CHF 60.6bn, exceeding the total surplus for 2012 by CHF 3.5bn. For the whole of 2013, it may total CHF 80bn or 15% of GDP, providing strong support for the currency. For more than one year, the SNB has felt no need to intervene in currency markets. Still, reserves are likely to increase further in coming months as income from reserves is reinvested. The Swiss franc has remained resilient despite a more positive global macro outlook, with foreigners still very interested in the safe haven currency +2
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
24
12 5
Currency Strategy
Swiss Franc
VALUATION After being considered one of the most overvalued currencies a few years ago our long-term fair value estimate has moved towards market pricing indicating there probably are fundamental factors backing the persistent strength of the Swiss franc. The major contribution comes from low real interest rates combined with low inflation outside Switzerland, while domestic economy has continued to grow despite the strengthening of the currency. Currently our SEBEERmodel estimates indicate USD/CHF and EUR/CHF at 1.02 and 1.28 respectively. This development is also confirmed by the development in the nominal trade weighted index for the CHF. From previously being substantially above its nominal trade weighted index the CHF is currently more aligned with its long-term trend confirming the changes in the SEBEER estimate. Nevertheless, valuation will eventually drag the franc lower although the downside potential is substantially smaller than what we estimated only two years ago. -1 POSITIONING A rare net long CHF positioning built in November and December has over the past weeks been almost neutralized. The negative trend this sharp change has created, provides the negative score for CHF. -1 TECHNICALS The swissy keeps its medium-term meandering around an at large flat yearly average and excessive moves away from it (on both sides) are repeatedly rejected. If not breaking into/below the average in a shorter-term perspective, a cautious positive grade would be warranted. 0 LIQUIDITY, EVENT RISKS AND GLOBAL CYCLE The Swiss franc remains a prime destination for capital as long as there is no definite end to the debt crisis in Europe. Fundamental data are as sound as ever, underscoring the role of the CHF as a safe haven. The SNB will maintain its monetary strategy and it will continue to defend the EUR/CHF minimum exchange rate of 1.20 while it is highly unlikely that the floor will be raised anytime soon.
Q4 Q1 2011 Q2 Q3 Q4 2012 Q1 Q2 Q3 Q4 2013
Technical view: BOE CHF index

Weekly QCHFBOEEER=
2011-09-30 - 2014-04-11 (STO) Price
146,00 145,00 145,00

144,25 144,00
143,00 142,00 141,00

.12
Q1 Q2 2014
25
Currency Strategy
Swedish krona
The krona weakened late 2013 as the ECB cut rates and Swedish inflation continued to surprise on the downside, forcing the Riksbank to bow to increasing pressure to lower rates. When the actual rate cut was delivered on Dec 17, the krona bottomed out. Its trade-weighted value has since recovered by almost 3.5%. We maintain a positive outlook for 2014 although most appreciation is expected in the latter part of the year. ECONOMIC FUNDAMENTALS While growth in 2013 is set to be weaker than we first thought, most leading indicators suggest a solid recovery this year. SEB projects Swedish GDP to increase by 2.5% in 2014 and 3.3% in 2015. The recovery will be broad-based and previous weak export performance will improve. GDP however will mainly be driven by domestic factors, including private consumption, investments and government spending. The labour market has been surprisingly strong and we expect continued employment growth. This will have hawkish implications for Swedish monetary policy in 2015 as growth is once again more dependent on domestic factors. Strong fundamentals have encouraged foreign investors to buy Swedish bonds and equities. We expect these purchases to be maintained though they will not play as important a role for the SEK as in recent years. Only a major house price collapse (not in our forecasts) would likely result in heavy selling by foreigners of their almost record high Swedish asset holdings. +1 MONETARY POLICY At last, monetary policy clearly reflects the prospects of continued low inflation at the expense of household credit growth/financial stability. As such the Riksbank retains an easing bias, although we do not expect further cuts. Monetary policy will therefore fail to provide the SEK with any tailwind until H2 2014 at the earliest, and the risk for continued low inflation surprises will be a SEK negative. The central bank is still very relaxed regarding krona developments; once again the reason the Riksbank wishes to avoid a much stronger exchange rate is mainly the risk of low inflation. The central bank expects inevitable monetary tightening in 2015 to drive EUR/SEK towards 8.50 next year. -1 FLOWS The current account surplus remains around 67%/GDP. Since 2010, both goods and services accounts have stabilised at 2.5% and 3.5% respectively, while net investment income has increased from 2% to almost 3%/GDP. Net FDI however remains negative in the basic balance. In Q3 2013 Swedish reinvested earnings (outflow) accounted for SEK 20bn, compared with a SEK 54bn current account surplus during the same quarter. Taking net errors and emissions into account (-SEK 37bn), the current account is flat. Furthermore, Swedish companies retain large FX deposits. Therefore overall, the large surplus overstates the positive flow effects for the SEK. Given the pro-cyclical state of the currency and the improving export outlook we regard flows as slightly positive for the currency. +1 E one
26
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
12 5
Currency Strategy
Swedish krona
VALUATION Since summer the krona has weakened and in trade-weighted terms the krona appears somewhat undervalued compared to our estimated long-term fair value. Hence, valuation is not an obstacle for further appreciation if the global business cycle continues to improve. Our estimate of the long-term fair value in EUR/SEK is 8.30, which we think is reachable in medium term. Based on valuation alone one should not expect any larger SEK moves. +1 POSITIONING The proxy for speculative positioning indicates that speculators are slightly long SEK vs. USD. The most recent change was a reduction of the long position but price action since then indicates that the net long position was likely increased. As the absolute size of the net long position still is quite small and there is no clear trend, the positioning score is a neutral zero. 0 TECHNICALS The TCW index holds over the flat yearly average and as long as this is the case the medium-term outlook remains SEK negative. A convincing weekly close below the average (117.30) would neutralize, but the scenario would not become SEK bullish without violation below SEK resistance at 115.20. -1 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE As Federal Reserve tapering is approaching, liquidity and flight to large currencies has been a theme on FX markets. In this context, SEK has been punished as a small and illiquid currency but not to the same extent as some of the other peripheral G10 currencies. The main risks for the krona currently 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. We still attach a low probability to this event happening. 2) Continued positive (low) inflation surprises which would trigger and force the Riksbank to lower rates additionally. Given the pattern of speculative accounts trading SEK on the prospect of changes in Riksbank monetary policy, this in our view would be one of few reasons why EUR/SEK would trade back above 9.00 again.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: TCW index

Weekly Q.TCW
2012-06-22 - 2014-03-28 (STO) Price SEK
122,00 121,00 120,00 119,00 118,00 117,78 117,29 117,00 116,00 115,00 114,00 113,00
.12
Q3
Q4 2012
Q1
Q2
Q3 2013
Q4
Q1 2014
27
12 5
Currency Strategy
Norwegian krone
Since the June rate decision the NOK has depreciated by around 8.5% against the EUR. Negative data releases and persistent dovish monetary policy surprises have weighed on the krone. A large share of speculative NOK trading has resulted in unusually high volatility. We expect economic data to gain importance as the highly uncertain macro outlook justifies Norges Bank in retaining its easing bias. Although we do not share the markets view, expectations of a possible rate cut will continue to weigh on the NOK in the near-term. The flow outlook has been negative as foreign banks have aggressively net sold NOK. Improved risk appetite and Brent oil prices remaining above USD 100/b (as we forecast) may help support equity related flows. We expect EUR/NOK to range-trade 8.30/8.60, with few signs suggesting (just yet) a significant recovery in the NOK. Instead, we recommend buying EUR/NOK on dips, due to the prevailing economic uncertainty. ECONOMIC FUNDAMENTALS The krone has suffered from poor Norwegian economic momentum; growth halted last spring. It should recover in the spring though increases in mainland GDP this year will remain below trend at 2.4%. Further, this is contingent on a pick-up in household spending which has yet to materialize. Solid household disposable income and employment growth will help facilitate such a recovery. Although investment growth in the oil sector will slow, it will be partly offset by higher non-oil exports, due to increased foreign demand and a weaker NOK. While we do not anticipate substantial decline in house prices, we accept the outlook is uncertain. Without continued negative data surprises fundamentals will be a small positive for NOK. +1 MONETARY POLICY Once again, Norges Bank presented a dovish rate path in December, not expecting a rate hike until mid-2015. Considering the highly uncertain economic outlook, the bank will retain its easing bias in the short-term. Going forward, the market will probably continue to discount a small likelihood of a rate cut, although we do not subscribe to that view. Instead, we expect rates to remain unchanged until March 2015 although risks of a cut cannot be ignored. As growth indicators improve, monetary policy uncertainty should recede and NOK volatility surrounding the banks rate decisions decline. Without a rate cut monetary policy will be neutral for the currency. 0 FLOWS Flows have been negative, due to further net NOK sales by foreign banks. Fundamentally, continued aggressive foreign selling of Norwegian assets is hard to justify. Less likelihood of central bank interventions, declining NOK volatility and rising risk appetite should help reverse the negative flow outlook. During the last 612 months the krone has also tended to depreciate every time speculators have reached a long currency position, which limits a NOK appreciation near-term. 0
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
28
12 5
Currency Strategy
Norwegian Krone
VALUATION Our long-term valuation model suggests that the krone appears cheap relative to its long-term fair value, especially after NOK-weakness this summer. Normally current valuation would be viewed as a strong signal to buy the krone. However, with a central bank favouring a weak currency and the special arrangements concerning oil related incomes make it more difficult to argue in favour of the NOK from a pure valuation perspective. Furthermore Norwegian competitiveness is still weak as its relative ULC has increased substantially. +1 POSITIONING The proxy for speculative positioning in NOK indicates that the market is slightly short NOK. However, the most recent changes have taken speculators from a net long to a net short positioning quickly. 0 TECHNICALS The Norwegian index remains on an ascending trajectory with the yearly average lagging (far) behind with a NOK negative slope. The move higher has taken the shape of a wedge which is an early sign of loss of momentum and the distance to the average is as said pronounced which may be deemed as a stretch. But while holding above the drawn ascending line of support (92.70) and recent lows at 92.20, there are no strong arguments to ease the negative NOK score. -3 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE. The greatest risk to NOK is clearly an unexpected rate cut on back of weaker GDP growth prospects. Core inflation will remain close to but below target in 2014 giving the central bank flexibility to focus on growth. The banks December rate path put the key rate stable at 1.50% until H2 2015, meaning the bank is one step closer to cutting rates should economic growth deteriorate further. The housing market is a wild card: Norges Banks forecast is even more optimistic than ours (10-15% gradual price decline from the nominal peak), leaving room for disappointments. Market is currently discounting a 3040% probability for a 25bps cut in March. However, this is likely not reflected to the same extent in the current exchange rate meaning such scenario would weaken the NOK. In addition, substantial drop in house prices could trigger foreigners to reduce exposure in NOKdenominated bonds.
SEBEER Long-term Fair value, NOK Index

130 125 120 115 110 105 100 95 90 85 80
2000 2002 2004 2006 2008 2010 2012
NOK
Long-term Fair value
Technical view: NOK Index (I44)

Weekly Q.NOI44
2012-09-28 - 2014-02-28 (STO) Price
94,03 94,00
93,00 92,00 91,00 90,00 89,40 89,00 88,00 87,00 86,00 85,00
.12
o n d j f m a m j j a s o n d j f Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14
eric
29
Currency Strategy
Danish Krone
The overall trend of increasing tranquillity in the Euro area is still an important theme in understanding the dynamics of short term moves into the Danish Krone. In 2014 safe haven flows is not expected to play a major role. Strong fundamentals, improving economic conditions and very sound current account position do underscore the benign position of DKK. Trading in the upper end of its band versus EUR, we see slight appreciation ahead. ECONOMIC FUNDAMENTALS Although 2013 as a whole is expected to produce a 0.5% GDP expansion, the Danish economy did end the year on a stronger footing than this number indicates. Consumption is still sluggish but expected to improve as past years significant fiscal austerity ends. Fiscal position is expected to be in balance in 2013 as well over the coming years and combined with low public debt to GDP, this stands out on the positive side. High private debt is still a risk longer term, but in the rate environment we see ahead, not an acute one. GDP growth is expected to be above 2% in 2014-2015. +1 MONETARY POLICY EUR/DKK is allowed to fluctuate by +/- 2.25% around its central parity (7.46038), but in practice DCB has maintained a tighter range (7.465 to around 7.425) since the euro was introduced. Since summer 2013 the currency drifted towards the higher end of the range (around 7.46). The deposit rate stayed negative at -0.10% and below the ECBs zero-rate. Policy lending rates converged gradually during 2013. Due to weak inflation dynamics and slow recovery in the euro area SEB expects ECB to start a QE program in Q2. In this case DCB might have to ease policy to keep the Krone from appreciating. With stronger fundamentals both fiscally and externally monetary policy must be the (negative) factor counterbalancing an upward pressure of DKK versus the euro. -1 FLOWS Although fluctuating more in 2013 the trade balance stayed on average close to the level of prior years around 5-7 DKK bn a month. However, the income component of the current account keeps growing as years of significant trade surpluses adds to net foreign assets. While Danish exports should grow with SEBs more favourable global economic outlook, improving domestic demand is expected to counter this effect. Portfolio flows will likely be a continued mild headwind as investors fear for a renewed escalation of the euro crisis diminishes further. +1
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
E one
30
12 5
Currency Strategy
Danish Krone
VALUATION According to nominal valuation DKK is trading at fair-value, although in real terms the currency is slightly overvalued. However, the chronic trade and current account surpluses suggest that DKK is undervalued and that part of the conclusion from the real effective DKK is due to measurement problems with productivity and terms of trade (Danish exports have increased in price versus imports). Putting it together we see valuation as neutral. 0 TECHNICAL VIEW EUR/DKK is in the final stage of a DKK negative five-wave sequence. A turnaround in EUR/DKK is expected from somewhere between 7.4650 & 7.4750. Once this final move is completed, there would be room for DKK strength. +1 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE. DKK is a less liquid market while the global cycle is likely to be neutral to DKK (same score as EUR). In later years EUR/DKK has been negatively correlated to Eurozone uncertainty and investors have bought DKK as a hedge against an EMU break-up. If the expected improvement in Europe continues, some safe-haven related flows may leave Denmark. However after 1 years the Draghi do whatever it takes-speech, FX reserves in DK is just slightly below the peak seen in mid-2012. Higher rates that could trigger renewed troubles among indebted Danish household is the biggest single event risk.
E U R speculative positio ns Technical view: USD /C A D EUR/DKK
Weekly QEURDKK=D2 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0
E U R /U S D
2012-02-24 - 2014-03-28 (STO)
10 0 75 50 25 0 -2 5
12 5
100,0% 7,47
Price
7,47
7,46 7,46 7,46
3
04 05 06 07 4
7,45
The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should 7,44 the sub-1.29-area be revisited, speculative longs will have to be reduced.
2
Q2 Q3 Q4 2012 Q1 Q2 Q3 2013 Q4 Q1 2014
7,43
.12
31
Currency Strategy
Russian rouble
The rouble is likely to weaken against the basket over coming quarters. The external position is strong with massive FX reserves, but the current account surplus is narrowing and capital outflows continue. The enviably low public indebtedness is no longer in focus. Instead, investors fundamental yard stick is growth and structural reform progress two areas less flattering for Russia today. Likewise, another former RUB-supportive factor carry is lending little support for the rouble as long as it is out of focus for markets. The central bank will cut rates and seems tolerant of additional currency weakness as long as it is gradual. Valuation has improved, but outside the natural resource exporting sectors, international competitiveness is still an issue and depreciation is required to compensate for higher inflation and wage growth than elsewhere. ECONOMIC FUNDAMENTALS After six consecutive quarters of decelerating GDP growth and a flat reading of 1.2% y/y in 3Q 2013, the economy is set to recover. However, the recovery is likely to be modest and growth will only reach levels that are far below the performance before and after the Great Recession. Indeed, we expect GDP to rise by only 2.3% in 2014 compared to 1.4% last year. Retail sales growth has stabilised at 3-4% and is supported by a tight labour market, still strong real wages and elevated consumer confidence. Credit growth to households has eased but remains strong at 30% y/y. Private consumption is, hence, likely to remain a key driver of the economy. Real investments and industrial production, however, are stagnant and manufacturing PMI fell to a 4-year low of 48.8 in December. It is encouraging that both the central bank (CBR) and government representatives now fully acknowledge the structural causes of this sharp slowdown. Unfortunately, there is little reason to expect any material progress on structural reforms that would bolster investments, productivity and growth for now. 1 MONETARY POLICY The new CBR head has proven more independent than expected. With CPI (6.5% in Dec.) still above target, policy rates have been on hold despite weak growth. CPI will, however, fall towards the new target (5% +/- 1.5pp for 2014) and we expect the policy rate (and corridor) to be cut by 25bps each in 3Q and 4Q from 5.5% now. Market rates and yields are elevated but this is only marginally RUB-supportive since carry is (and will remain) a weak FX driver. 2014 is the year of transition to inflation targeting and a free-floating rouble by early 2015. The fluctuation band for the basket/RUB has been lifted repeatedly since last summer (33.30 40.30 now) as the CBR intervenes in support of the RUB. Still, the CBR clearly tolerates continued RUB weakness as long as movements are gradual. We expect the band to be widened further and to be dismantled during the course of the year. 0 FLOWS The latest C/A data showed a surplus of USD 1.1bn in 3Q 2013. This compares to 5.8bn in 3Q the
1 .3 5 0 1 .3 0 0 1 .2 5 0 1 .2 0 0 1 .1 5 0 Contracts (thousands)
E U R sp e cu la tive p o sitio n s U S D /C A D E U R /U S D
1 25 1 00 75 50 25 0
S p e cu la tive p o sitio n s
04 05 06 07
-25
32
Currency Strategy
Russian rouble
previous year. The C/A surplus to GDP probably fell by half in 2013 to about 2% and it remains on a declining trend. Oil production and prices are edging down (we expect Brent at USD 102.5 p/b this year) while imports are held up by consumption. Meanwhile, the CBR has estimated that capital outflows reached USD 55bn in 2013. We see little reason to expect a sharp reduction this year. Overall, this has left FX reserves fairly stable over the last half year at around USD 510bn. Overall, flows are still supportive and during 1Q seasonality is positive for the RUB. +1 VALUATION Recent RUB weakness has improved valuation both in nominal and real terms. Indeed, the NEER measure is almost back to the bottom in early 2009. In real terms, current valuation is also below the 10-year trend, which is on a rising path due to excessive Russian inflation. The real value of the rouble is not a problem for the natural resource extracting businesses. They are price takers on the global market and they sell all they produce. However, the REER is too strong for the other sectors of the economy that are exposed to international competition. Indeed, the economy is suffering from the so called Dutch Disease. The long-term remedy involves diversification and will require much more far reaching structural reforms than the ones currently under way. Valuation now scores: 0 POSITIONING The RUB proxy speculative position indicates that speculators are short RUB. The trend is for a continued build-up of the short position and as the size of the short position currently is rather limited there is room for more negative RUB sentiment before any excess levels in positioning is reached. The slightly negative score is due to the speculators bearish sentiment towards the RUB. -1 TECHNICALS The rouble is on a losing track measured against its index. The yearly average is sloped negatively to the rouble and even if the distance to the average is pronounced, there are no signs visible that things will turn to the better for the currency. Acceleration through RUB support at the 39-level would open up for extension towards 40.50 while a less expected drop under 37.60 would ease the negative grade some. -5 EVENT RISK, LIQUIDITY AND GLOBAL CYCLE The key event risk for the rouble is if oil prices were to fall sharply. We expect oil prices (Brent) to fall slowly towards USD 100 p/b in 2015, but the shale revolution poses a risk of further declines. Episodes of flight to liquidity typically damage the rouble significantly which is aggravated by concomitant increases in capital outflows. Domestic political tensions are likely to increase over time as poor growth prevents continued rapid increases in living standards and as the opposition gradually gets organised. Terror attacks, such as those in Volgograd in December have largely left the RUB unaffected for now.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
Technical view: RUB vs. basket
Weekly QRUS=
2009-02-27 - 2014-06-13 (STO)
Price RUB
42,0 40,0
38,8 38,0
36,7 36,0 34,0 32,0

.1
2010 2000
2011
2012 2010
2013
2014
33
12 5
Currency Strategy
Chinese Yuan
CNY has been the star currency last year even in the face of stronger USD and weaker emerging market currencies. We have held a long CNY vs. USD 1M NDF since July and we continue to hold this position in 2014. Our 2014 yearend target on USD/CNY is 5.90. The key to CNY strength is the central bank tightening faster than the Fed and rise in US yields. China has been tightening monetary conditions to reduce imprudent lending from banks and shadow banking. China is also liberalizing interest rates, which lead to higher rates since artificially low deposit rates will be free to rise according to market forces. In addition to relative tighter monetary policy, CNY should appreciate from structural policy to encourage exporters to move up the value chain, reduce accumulation of FX reserves and US Treasury as the Federal Reserve exits Quantitative Easing. Our CNY trading strategy is to be long CNY 1M NDF since it is less sensitive to global monetary policy volatility such as possible accelerating in tapering by the Federal Reserve. ECONOMIC FUNDAMENTALS Growth decelerated in Q4 to 7.7%yoy from 7.8%yoy in Q3. Q3 growth was helped by resurgence in domestic construction activity since the government started small and targeted adjustments to support growth and that effect is wearing off. Going forward, we see growth slowing from monetary tightening and deleveraging despite stronger exports from better US growth. Also, with land reforms and property tax implementation, the initial reaction will reduce construction activity. Our growth forecast for 2014 is 7.4% compared to 7.7% in 2013. +1 MONETARY POLICY Monetary conditions have tightened from higher interbank rates and authorities reducing the growth in non-bank lending, the biggest driver of monetary stimulus since early 2012. The measures are to enhance transparency and limit non-bank lending. In addition, with interest rate liberalization, artificially low deposit rates will be lifted and tighten monetary conditions. +1 FLOWS The external balance remains CNY positive as China runs a current account surplus of around 2% of GDP. With export recovery, Chinas trade surplus will remain high and keep the current account in a steady surplus. Furthermore, capital flows and hot money are moving towards China again as RMB denominated assets, especially property perform well. Property price increase will slow but it will remain positive and continue to attract hot money inflow. It also helps that CNY continues its steady appreciation in spite of increased volatility and depreciation in most EM currencies. +2
50 40 30 20 10 0 -10 -20 -30
1.30 0 1.25 0 1.20 0 1.15 0
75 50 25 0
04 05 06 07
-2 5
07
08
09 10 11 12 13
10 9 8 7 6 5 4 3 2 1 1 t c O 1 1 c e D
7day repo rate %
20d mvavg
2 1 b e F
2 1 r p A
2 1 n u J
2 1 g u A
2 1 t c O
2 1 c e D
3 1 b e F
3 1 r p A
3 1 n u J
3 1 g u A
E U R speculative positio ns U S D /C A D 12 5 E U R /U S D % yoy 3mma 1.35 0 SEB China construction indicator 10 0
3 1 t c O
3 1 c e D
12 10 8 6 4 2 0 -2 -4 -6 03
China BOP % of GDP
Current Account 04 05 06 07 08
Capital flows ex FDI 09 10 11 12 13
E one
34
Currency Strategy
Chinese Yuan
VALUATION According to NEER and REER models, CNY is over-valued since CNY has appreciated considerably over the last 5 years. However, as long as CNY runs a healthy current account surplus, FX reserves are rising and official fixing on USD/CNY remains higher than the more market driven spot markets, we think CNY is under-valued. Overall, this results in a valuation score of zero. 0 POSITIONING Positioning differs by market. First, the implied carry on USDCNY NDFs is a small negative, which means that offshore investors are positioned for a lower USDCNY. Second, onshore are already positioned for USDCNY lower since the spot market continues to hug the bottom of the allowable daily trading band of +/- 1%. Third, offshore CNH position is biased to short USDCNH since CNH offers positive carry and has been stable in the recent EM sell-off. RMB deposits in Hong Kong are also steady meaning people are accumulating CNH. -1 TECHNICALS The 1yr USD/CNY NDF contract has extended the decline well below prior support at the 2008 low of 6.2370. The move looks like a Wedge (which indicates lesser momentum and in turn highlights the reaction risk). The distance to the (negatively sloped) yearly average might be a bit too steep and a reason for the market to soon start consolidating a medium-term excessive move. +3 LIQUIDITY, EVENT RISK AND GLOBAL CYCLE. The yuan is often seen as a strong currency to hold in liquidity crisis since CNY pegs to the USD in times of stress. However, for forward investors, the CNY can sell off quite a bit and lose value. The key risk for China this year is disappointment on reforms. A bold reform direction was set in November by President Xi and now policymakers are busy adding details and setting directions for implementation. The measures will trickle out over the next year but markets may be disappointed by implementation relative to high expectations. On the flip side, reforms such as cleaning up bank lending and shadow banking may be too strong and lead to downside risk to growth and monetary easing. Changes always lead to volatility and higher risks.
Eview: U R speculative positio ns Technical 1y USD/CNY NDF U S D /C A D

1.35 0 1.30 0 1.25 0 1.20 0 1.15 0
10 0 75 50 25 0
04 05 06 07
-2 5
1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5
UDSCNY spot spread to fixing %
CNY 0 1 p e S 0 1 c e D 1 1 r a M 1 1 n u J 1 1 p e S 1 1 c e D 2 1 r a M
High 2 1 n u J 2 1 p e S 2 1 c e D
Low 3 1 r a M 3 1 n u J 3 1 p e S 3 1 c e D
35
U S D /C A D E U R /U S D
12 5
Currency Strategy
Guide to indicators
COMMITMENT OF TRADERS (COT) REPORT
The CoT report (weekly) seeks to describe market positioning in a currency future on the Chicago Mercantile Exchange. The Exchanges trading members must state whether their trading purposes comprise either commercial hedging or speculation. Speculators are regarded as either large (noncommercials) or small. We present and analyse the positioning of large speculators in order to understand sentiment in the currency. The chart presents the net open position (non-commercial longs less non-commercial shorts). For those currencies not available in the CoT report we have created a proxy (see FX Ringside 2006-04-04).
EXTERNAL DATA SOURCES

The main data providers used in this report are: SEB, national sources, Reuters Graphics and Macrobond.
SEASONAL PATTERN
We have calculated the seasonal effects using a regression approach. In the regression we have used the monthly percentage change in the exchange rate as the dependent variable and dummy variables for the different months as explanatory variables. Our dataset consists of end of the month daily close FX rates over the last 10 years.
SEB STRETCH-O-METER
This indicator shows how stretched a currency pair is by measuring the distance between the current rate and the 200 day moving average expressed in standard deviations. Values in excess of +/-3 are to be considered over-stretched and often signal an increased reaction/reversal risk.
BASIC BALANCE
The basic balance is a flow indicator that includes the current account balance and net flows from both direct- and equity investments. The broad basic balance also includes the private sectors net trade in debt securities.
EFFECTIVE EXCHANGE RATE (ER)

A nominal effective exchange rate is the value of a currency against a basket of currencies. The Bank of England calculates the ER using IMF-provided weights. Each currency is given a weight that reflects its relative importance in the countrys trade flows. An increase (decrease) in the BoE index reflects an appreciation (depreciation) of the currency.
36
Currency Strategy
SEB INTERNAL FX 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 is available. We have therefore built an analytical framework around our own flows which we use to assess market sentiment and positioning for SEK. Speculative flows still the main driver of EUR/SEK. Foreign financial flows have generally been the main driver of EUR/SEK throughout 2013, reacting primarily to changes in the Riksbanks outlook for monetary policy. Since 2013 there are generally three distinct periods: (1) The period running up to the Riksbank rate decision in April where the only client category with net SEK buying of any significance were Foreign financial institutions (market participants of a more speculative nature and the most resembling client category to the ones covered in COTs speculative positioning data). (2) After the (dovish April Riksbank rate decision, foreign financials were, on the contrary, the only client category net selling SEK. (3) December and January when Foreign financial institutions began to buy SEK again. The chart below shows how Foreign financials weekly aggregated net flow and EUR/SEK have to followed each other closely in 2013. Therefore, we assume that mainly speculative flows have been responsible for the SEK ups and downs during 2013. If assuming that speculators where positioned neutral at the beginning of the year they would, based on our flows, have been very short SEK vs. EUR in the beginning of December and but have in January began to scale down their short position. The other main client category which we follow closely is Domestic corporates. They have been buying SEK increasingly since it approached what we previously have expressed as good hedging levels (around 8.80-9.00). However these flows still appear to be too small in a global context to yet have a larger impact on EUR/SEK. Though with our view of a continued recovery of the global economy in 2014 these flows ought to increase in size and at least provide a larger support for SEK.
Background information framework Input data: Since SEBs share of trading in SEK is large, our order flow and FX tick database may provide significant information regarding market sentiment in SEK crosses. 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 with four indicators to provide information on client SEK sentiment and positioning: Net flow (%): Net flow / volume Volume index: Volume / average volume Volume weighted net flow: Net flow(%) x Volume index Aggregated net flow (position proxy) Client categorization: Of course, while total net flow and volume are interesting, we believe (a view also 1 supported by research findings and in-line with how 2 Commitment of traders data widely is analyzed ) 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 2. Foreign corprorates 3. Domestic financial institutions 4. Domestic corporates
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) Noncommercial (i.e. speculative) and (3) Small accounts. However, in FX a widely used praxis is to follow only the non-commercial flows.
37
Currency Strategy
Contacts
STOCKHOLM Carl Hammer (editor) +46 8 506 231 28 carl.hammer@seb.se
FRANKFURT Thomas Kbel +49 69 97 27 12 45 thomas.koebel@seb.de OSLO Erica Blomgren +47 22 82 72 77 erica.blomgren@seb.no SINGAPORE Sean Yokota +65 6505 0500 sean.yokota@seb.se
Richard Falkenhll +46 8 506 231 33 richard.falkenhall@seb.se Dag Mller +46 8 506 231 29 dag.muller@seb.se Mats Olausson +46 8 506 232 62 mats.olausson@seb.se Karl Steiner +46 8 506 231 04 karl.steiner@seb.se Anders Sderberg +46 8 506 230 21 anders.soderberg@seb.se
38
Currency Strategy
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 authors 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.
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39
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Currency Strategy: Scandie Parity As The USD Climbs Higher

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Currency Strategy: Scandie Parity As The USD Climbs Higher

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Scandie parity as the USD climbs higher

WEDNESDAY 22 JANUARY 2014

EDITOR Carl Hammer + 46 8 506 231 28

Forecasts and FX Scorecard

*Bloomberg survey FX forecasts.

SEB FX G10 Scorecard, Medium Term

Total weighted score

G10 FX Scorecard - Contributions to total score

SEB FX EM Scorecard, Medium Term

Big Picture: Growth and monetary policy drive FX outlook

Contribution to portfolio performance

1.30 0 1.25 0 1.20 0 1.15 0

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

Technical view: USD INDEX

82,00 81,43 81,00 80,95 80,00 79,00

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

Technical view: ECB EUR index

110,84 110,00 108,98 108,00

106,00 104,00 102,00 100,00 98,00

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

JP CPI ex fresh foods YoY %

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

Technical view: BOE JPY index

190,00 180,00 170,00

150,00 144,48 140,00 134,80 130,00

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

British pound sterling

1.30 0 1.25 0 1.20 0 1.15 0

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

British Pound Sterling

1.30 0 1.25 0 1.20 0 1.15 0

Technical view: BOE GBP index

82,00 81,69 81,00 80,00 79,00 78,00

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

85,00 84,00 83,00

1.30 0 1.25 0 1.20 0 1.15 0

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

Technical view: BOE CAD index

115,00 110,26 110,00

105,00 104,40 100,00

161,8% 96,10 100,0% 93,41

2012 2013 2010

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

FLOWS Capital inflows have been supportive for the

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

Technical view: BOE AUD INDEX

115,00 110,00 106,41 105,00 100,00 98,40 95,00

50,0% 93,75 61,8% 88,19

90,00 85,00 80,00 75,00

2012 2013 2010

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

New Zealand dollar

1.30 0 1.25 0 1.20 0 1.15 0

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0