DB FX Daily: SEK Lags in G10 Carry Drop, US FDI and the Dollar

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FX Daily: SEK Lags in G10 Carry Drop, US FDI and the Dollar

SEK Underperforms in Recent G10 Carry Correction

SEK has been the worst performing G10 currency year-to-date following the interest rate shock delivered via the dovish Riksbank repo rate forecasts delivered back in mid-February. Even though it is one of the lower yielding G10 currencies, it significantly underperformed JPY and CHF in the latest G10 carry correction. Governor Ingves is due to speak early today and we would expect little change to the message so soon after the Riksbank's February meeting. Since then EUR/SEK has held around 9.30 due to some stability on rate spreads (see chart at left below) as well as the grind higher in EUR/USD given the negative correlation between EUR/USD and EUR/SEK. We continue to see a 9.15-9.35 range holding in EUR/SEK for the time being though with the rates market continuing to price more than the forecasted Riksbank repo rate peak at 3.50% and Euribor still falling short of 4% ECB rates a move to both these levels could test the upper end of this range. Going forward, our economist continues to forecast rate rises to 3.75% by the end of this year (the market also leans in this direction) and the remaining potential for M&A inflows should the privatizations scheduled to begin in Sweden bring significant foreign buying interest. Both of these factors could be needed to push EUR/SEK back to the levels around 9.00 seen earlier this year.

Net FDI the Only Thing to Watch in US Current Account

The US current account release often fails to stir the market as it is old news from Q4 with most of the components known ahead of time from the monthly trade releases. We expect the current account deficit to pull back to around USD 200 bn or 6% of GDP from last quarter's reading of USD 225 bn and 6.7% of GDP. While the market is likely to ignore the old news that lower energy prices have helped the US external imbalance to contract slightly, it may be worth taking a look at the net FDI component of the current account release given its relationship with the longer-term USD trend shown in the chart at right below. Though our monthly basic balance measure which looks at the US trade deficit against portfolio flows has turned in favour of the USD over the past year, net FDI turned to a net outflow over the past year and has painted a more negative USD picture than the portfolio flow data.