DB FX Daily: London EUR/SEK; NZD/JPY; CAD data risk

[RTFX-Trading]

FX Daily: London
EUR/SEK; NZD/JPY; CAD data risk
Hawkish Riksbank drives EUR/SEK lower
While a rate hike by the Riksbank had been widely expected, the size of the upward revision to the projected future rate path was a surprise. Riksbank Bank stated that rates were now likely to be raised to around 4% by end 2007 (two more hikes), with the terminal rate now projected at around 4.5%. This compares to their previous MPR in February where they had only signalled an intention to raise rates to 3.75% in Spring 2008, and to leave rates at this level for the following years.

Rates markets in Sweden sold off aggressively on the news, with two year yields up 15bp. Likewise, EUR/SEK fell around 1.6% over the day. If we update our EUR/SEK and rate spread chart (see below for the state of play at the NY close) it appears that EUR/SEK and rate differentials have now largely realigned, which may make it difficult for this move to extend much further over the near term.

NZD/JPY move looks extended give rate differentials
While the overall backdrop for carry trades remains favourable - low levels of volatility in FX markets and Treasuries having largely `settled down' - the most recent move higher in NZD/JPY does appear a little overdone in our view.

The chart on the right shows NZD/JPY against the respective two year rate spread (chart prepared around the NY close). As the chart shows, the recent pullback in rate spreads has not been matched by the NZD/JPY cross, which has in fact gone on to make new highs. This move in the cross has stretched the usually tight relationship between NZD/JPY and the two year rates differential. In contrast, the move higher in EUR/JPY has continued to largely track the differential between Euro zone and Japanese rates. Finally, with kiwi continuing to move higher, we also wouldn't want to rule out further intervention by the RBNZ.

Canadian wholesale trade data suggest weak retail sales
Our Canadian economist sees yesterday's wholesale sales data as pointing to downside risk on today's retail sales report (wholesale sales fell by 3.1% mom in April). While we continue to think a short AUD/CAD position makes fundamental sense (see Tuesday's daily), we think the event risks around today's Canadian data are such that we would not head into the retail sales report with such a position.