macro & ficc research sek views

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. Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in the US. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct of investment business in the UK.

Macro & FICC Research

SEK Views Wednesday, 20 October 2021

You are short with modest expectations ahead Our biannual survey of financial institutions and corporates shows that the market has continued to scale back the sizable overweight position in SEK, as reported in October 2020 and April 2021 and now has the second-largest underweight SEK position among survey respondents since April 2015. Looking at the different drivers, it is apparent that the market has also shifted its outlook in a more negative direction, as Fed policy is expected to be very SEK negative ahead. Expectations for EUR/SEK and USD/SEK are very muted; the survey forecasts are flat. Regarding the monetary policy outlook, survey participants expect a rate rise to be adopted in the updated rate path at the Riksbank policy meeting in November. High inflation is expected to be transitory but stickier than the current Riksbank forecast. We expect SEK-positive flows near-term but don’t expect EUR/SEK to break 10.00 on a more sustainable basis until 2022.

Is SEK suffering from “structural outflows”? SEK Views is our biannual flagship report on Swedish macroeconomic developments, Riksbank monetary policy, the FX market outlook and ad-hoc research on relevant topics. As usual, this report contains our FX survey of the biggest FX trading counterparties in Sweden, asking them about their positioning, SEK forecasts, Riksbank expectations, etc. Having been very constructive on SEK in 2020, we moved to neutral at the start of 2021. EUR/SEK has nevertheless remained in range for longer than anticipated but is now finally trying the lower end of the 10.00/10.30 range. This report covers a few topics: 1) in our article “Is SEK suffering from structural outflows?”, we ask whether the low interest rate environment coupled with excess savings make for a currency that is unwanted by both domestic and foreign accounts. We conclude that as long as Sweden does not lower its savings and instead boosts demand and/or the Riksbank deviates from the ECB’s policy cycle, then EUR/SEK is bound to trade around 10.00 ahead (a weak USD could also push EUR/SEK below 10.00); 2) we look at the reasons (mainly inflation) why the Riksbank would break the pattern of closely following the ECB’s monetary policy cycle (would be SEK positive) and; 3) we investigate the near-term SEK outlook and flows (positive), with a detailed schedule for the upcoming IPOs.

Editor Carl Hammer Head of Macro & FICC research Filip Carlsson Olle Holmgren Karl Steiner

Source: SEB

Source: SEB

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Historical SEK positioningNet position (%)

Own organisation Market

Overweight in SEK

Underweight in SEK -40-30-20-10

010203040

Market ranking of SEK driversApr/21

Oct/21

Macro & FICC Research: SEK View Tuesday 19 October 202120 2

Content Page Content 2 SEB FX recommendations & forecasts 3-7 SEK Views SEK survey 8-12 Is SEK suffering from “Structural outflows”? 13-15 Can Riksbank deviate from the ECB? 16-18 Near-term SEK flow analysis

Contacts Filip Carlsson, +46 70 462 2042

Carl Hammer (Editor), +46 70 302 6128

Olle Holmgren, +46 70 763 8079

Karl Steiner, +46 70 332 3103

Trades ideas • Range-trade in EUR/SEK to continue but with a near-term bias to break 10.00 (headed for 9.90/95). Buy a 6 months range bet in EUR/SEK

9.85 vs 10.20. • NOK/SEK to correct lower. NOK/SEK is trading above our near-term forecasts and we think the oil price will correct lower, that we will see

short-term SEK positive flows and that seasonality plays negatively for the cross October to December. • Long AUD/SEK. We think AUD has material upside based on valuation and RBA’s monetary policy normalization potential being

underestimated (see Currency strategy regarding AUD). • Buy a one-year ATM GBP/SEK put with knock-in at 12.25 on the argument that BOE will hike but that it will border on a policy mistake.

FX forecast FORECASTS

FX 10/20/2021 1M Q4 21 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23EUR/USD 1.163 1.16 1.16 1.15 1.15 1.14 1.13 1.13 1.14EUR/SEK 10.02 9.95 10.05 10.00 9.95 9.85 9.80 9.77 9.75EUR/NOK 9.77 9.90 9.95 10.05 10.05 10.00 10.00 9.90 9.80EUR/CHF 1.075 1.08 1.08 1.09 1.09 1.09 1.10 1.10 1.10USD/JPY 114.4 112 111 112 112 113 113 114 115USD/CAD 1.235 1.24 1.24 1.24 1.23 1.22 1.21 1.20 1.19EUR/GBP 0.844 0.83 0.82 0.81 0.82 0.82 0.83 0.83 0.84AUD/USD 0.749 0.76 0.77 0.78 0.79 0.79 0.80 0.81 0.82NZD/USD 0.716 0.70 0.72 0.73 0.74 0.74 0.74 0.74 0.74USD/SEK 8.619 8.58 8.66 8.70 8.65 8.64 8.67 8.65 8.55GBP/SEK 11.873 11.99 12.26 12.29 12.13 12.01 11.81 11.77 11.61NOK/SEK 1.026 1.005 1.010 1.00 0.99 0.99 0.98 0.99 0.99JPY/SEK 7.53 7.66 7.81 7.76 7.73 7.65 7.67 7.58 7.44CAD/SEK 6.98 6.92 6.99 7.01 7.03 7.08 7.17 7.21 7.19AUD/SEK 6.45 6.52 6.71 6.74 6.84 6.83 6.94 7.00 7.01CNY/SEK 1.35 1.34 1.35 1.36 1.36 1.37 1.38 1.38 1.37CHF/SEK 9.33 9.21 9.31 9.17 9.13 9.04 8.91 8.88 8.86USD/NOK 8.40 8.53 8.58 8.74 8.74 8.77 8.85 8.76 8.60GBP/USD 1.378 1.398 1.415 1.413 1.402 1.390 1.361 1.361 1.357EUR/JPY 133.0 129.9 128.8 128.8 128.8 128.8 127.7 128.8 131.1


SEK Views FX survey Wednesday, October 20, 2021

You are underweight with little hope for stronger SEK Our survey of Swedish Corporates and Institutions reveals that SEK-positioning on average is underweighted by domestic accounts. However, there is a clear discrepancy in positioning between Corporates and Institutions where Corporates are underweight in the SEK while Institutions remain overweight but to a lesser extent compared to previous surveys. The Fed is by far the strongest (negative) SEK driver and the drivers have shifted so that a majority are SEK negative. The EUR/SEK is expected at 10.10 at year-end and 10.00 at mid-2022 while the USD/SEK is seen at 8.75 and 8.65 for these periods. Long-term fair values for the EUR/SEK and USD/SEK have increased slightly. Few domestic accounts now plan to increase hedge ratios which perhaps lessens the resistance previously seen around the 10.30 handle in the EUR/SEK. Riksbank has changed from being a SEK-negative to a SEK-neutral driver but it is also expected to introduce a hike in its rate path relatively soon. This increases the probability for the EUR/SEK to finally break out of the 10.00/10.30 range.

Carl Hammer +46 70 302 6128 [email protected] Karl Steiner +46 703 323103 [email protected]

SEK Views survey on client positioning

Participants are underweight SEK but the market is neutral. Our bi-annual survey of Corporates and Institutions shows that survey participants are underweight in the SEK (-15%) while they expect the market in general to hold a neutral position (-2%). This is the second consecutive report where survey positioning has decreased, which is indicative of participants losing hope for more SEK appreciation. In the previous report from April 2021, the market was perceived to be slightly overweight in the SEK with a net balance of +7%.

This is also the second-largest underweight SEK position amongst survey respondents since April 2015 and is a bit counterintuitive given that the SEK has traded sideways vs the EUR. However, the SEK has depreciated more clearly versus the USD (-5.3% YTD), and vs G10 currencies (equally weighted index) the SEK has depreciated by 2.6% and is the third worst performing G10 currency only surpassed by the JPY and EUR.

The largest change in positioning was among Corporates who went from a net balance of -9% to a large underweight of -33%. Meanwhile, Institutions continue to be overweight in the SEK but to a decreasing degree, having gone from +62% one year ago to +17% in the spring and now to a net balance of +10%.

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Historical SEK positioningNet position (%)

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Overweight in SEK

Underweight in SEK

mailto:[email protected]


Macro & FICC Research Wednesday, October 20, 2021 4

The perception of the market positioning also varies between Corporates and Institutions. Corporates believe the market is slightly overweight with a net balance of +7%. Institutions have the complete opposing view being overweight themselves in the SEK (+10%) but expecting the market to be underweight (-29%). Those perceptions could be one reason that financial institutions believe in a slightly stronger SEK than do Corporates i.e. not only because of their own positioning but as Institutions see the market as underweight they believe there is thus a possibility for a strengthening of the SEK when the market switches to a position more similar (and SEK positive) to theirs.

SEK drivers turning negative. The market perception of SEK drivers is that they have deteriorated and are mostly SEK negative. The most negative driver by far is Fed monetary policy, which in April was considered a slightly negative factor but one year ago was the most positive driver for the SEK. Given the current market focus on Fed tapering signalling the beginning of a normalisation of policy, this is hardly surprising (Fed is regarded as a USD positive, SEK negative factor). Liquidity is the second largest negative driver but has also increased a lot (negative net balance). Risk appetite was the second most positive driver in the April survey, but this has changed and now it is the third most negative one. Clearly the view on risk appetite has shifted and the rest of the year is expected to show more uncertainty. The Riksbank was the second largest negative SEK driver in April but is now considered to be neutral. That makes sense as it is a central bank that has very little to offer in terms of expected rate hikes in the short term but has since April at least stepped away from a rate cut bias and is expected to introduce a hike in its rate path. As is clear in the Riksbank questions reported on later, a majority (60%) the survey respondents expect the Riksbank to introduce a rate hike in its rate path at its November rate decision. With such a view it is a bit surprising that the Riksbank is seen as a neutral driver. Exports is the most positive driver just as was the case in the April survey, but the positive net balance is much lower. On a separate question where survey participant was asked for the three most important drivers for SEK in the next 6 months global risk appetite followed by divergent monetary policy and relative growth came on top.

17

57

26

4

58

38

Overweight inSEK

Neutral Underweight inSEK

Corporates net position-33% (Apr-2021 -9%)

Apr/21

Oct/21 39 39

22 20

70

10

Overweight inSEK

Neutral Underweight inSEK

Financials net position+10% (Apr-2021 +17%)

Apr/21

Oct/21

-40-30-20-10

010203040

Market ranking of SEK driversApr/21

Oct/21 36

27

1713

4 2 105

10152025303540

Global riskappetite

Change ininterest ratedifferentials(divergentmonetary

policy)

Relativegrowth

Level ofinterest ratedifferences

(carry)

Relativegovernment

finances

Other Relativevaccination

rate

SEK drivers the coming six months


SEK appreciation expected but fair value estimations have risen. The market is expecting the SEK to strengthen against both the EUR and USD between December 2021 and June 2022 but the overall moves are tiny. We share the views in EUR/SEK trading close to 10.00 or a tad lower and we also expect small moves in USD/SEK at 8.65. Looking at long-term fair values for the SEK, the median indicates a less optimistic SEK view in the long run against both the EUR and SEK compared to the survey in April. Especially for the USD/SEK where the median now is 8.25 compared to 8.00 in April. However, the SEK is expected to strengthen against both the EUR and USD compared to the current exchange rate. Looking at Q4 2021, Q2 2022 and long-term valuation, Institutions overall expecting the SEK to be a bit stronger compared with the view of Corporates.

Survey participants FX forecasts

EUR/USD are implied forecasts based on the relationship between the respondents stated EUR/SEK and USD/SEK forecasts

Survey participants estimated Fair-value EUR/SEK and USD/SEK

EUR/USD are implied forecasts based on the relationship between the respondents stated EUR/SEK and USD/SEK forecasts

SEK is judged to be procyclical. For some time now we have asked the survey participants about their view on the correlation between the SEK and the business cycle. In 2020 a record-steep fall for the global economy was combined with a trade-weighted SEK that appreciated by more than 7%. During 2021 the recovery has continued but the SEK has started to weaken, hence the pattern is not obvious. In this survey 74% of participants remain with the view that the krona is indeed a pro-cyclical currency meaning the market is back to seeing the SEK as a very risk-on and risk-off currency. As we have stated before, the fact that the market holds the SEK as a procyclical currency will also have an impact on how both domestic and international corporates and investors adjust their SEK/FX hedges.

When asked which currency will outperform the others, it is interesting to note that the USD switched places with the NOK. The call in the April survey for the NOK to outperform the others followed by the USD was close to correct as these two currencies outperformed the EUR and SEK, although USD did strengthen slightly (+0.4%) versus the NOK instead of vice versa. The strong USD belief and NOK shows anticipation of the normalisation of policy rates as a major driver as both the Fed and Norges Bank may hike rates (the latter has already started) many times just to get back to the rate level just before the pandemic.

EUR/SEK EUR/SEK USD/SEK USD/SEKDec-21 Jun-22 Dec-21 Jun-22

Average 10.08 10.03 8.76 8.72Median 10.10 10.00 8.75 8.65High 10.30 10.50 10.00 10.00Low 9.80 9.50 8.24 8.00Average during survey EUR/SEK 10.07, USD/SEK 8.70, EUR/USD 1.16Implied EUR/USD forecast Dec-21: 1.15 and Jun-22: 1.16

EUR/SEK EUR/SEK USD/SEK USD/SEK EUR/USD EUR/USDDec-21 Jun-22 Dec-21 Jun-22 Dec-21 Jun-22

Financials 10.00 10.00 8.70 8.55 1.15 1.17Corporates 10.10 10.03 8.75 8.80 1.15 1.14

11

74

113 0

7

67

13 112

Ver

y pr

o-cy

clic

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Som

ewha

tpr

o-cy

clic

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tral

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tde

fens

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Ver

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Correlation SEK and the Business cycle (%)

Apr/21

Oct/21

Fair-value EUR/SEK USD/SEK EUR/USDFinancials 9.73 8.00 1.22Corporates 9.85 8.33 1.18

32

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11 13

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USD NOK SEK EUR

Which currency will outperform the others coming 6 months (%)

Apr-21

Oct-21

Fair-value EUR/SEK USD/SEKAverage 9.79 8.21Median 9.80 8.25High 10.40 9.10Low 9.00 7.00Median Apr-21 9.70 8.00


Riksbank views: Swedish central bank to follow ECB until CPIF spikes. Our thematic questions on Riksbank show: 1) Riksbank will pencil in a rate hike in its rate path in at the November policy meeting; 2) Riksbank will continue to follow ECB monetary policy cycle but will hike before the ECB if; 3) Inflation starts deviating or SEK weakens and; 4) Survey participants thinks inflation will remain elevated for a significant period of time.

Do not expect more SEK support from increased hedging ratios. Compared to the April survey there are fewer plans to make changes to hedge ratios and there are also fewer respondents saying that they have increased hedge ratios since the previous survey. Regarding Institutions there are as many respondents planning to increase hedge ratios as there are planning on decreases, while there is a very small net balance for increasing the hedge ratio (+3%) among corporates. Thus, one should not expect any large SEK buying from domestic accounts similar to what took place last autumn and what we believe was the main driver behind the SEK appreciation at that time. This year we have argued that the upper boundary of current trading range of 10.00/10.30 has been upheld by Swedish accounts increasing hedge ratios when the SEK reaches attractive levels such as around 10.30. The low level of interest in increasing hedge ratios shown in the survey weakens that argument and opens up the possibility of higher levels although the EUR/SEK currently already trades at the lower part of the range.

60

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Yes, hike No Yes, cut

Do you think that the Riksbank will signal any change in its interest rate path, which will be published at the meeting in November?

Share of respondents, %

5 5 2 2

86

Haveincreased

Plan toincrease

Havedecreased

Plan todecrease

No change

Corp change in hedging ratio (%)

06

06

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Haveincreased

Plan toincrease

Havedecreased

Plan todecrease

No change

FI change in hedging ratio (%)

4 0 0 0

96

Haveincreased

Plan toincrease

Havedecreased

Plan todecrease

No change

Corp change in maturity (%)

013

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Haveincreased

Plan toincrease

Havedecreased

Plan todecrease

No change

FI change in maturity(%)

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Yes No

Do you think the Riksbank will continue to be in sync with the ECB's monetary policy action?


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9

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00

5

10

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20

25

30

35

Divergent inflation /inflation

expectations

Development of the

krona

Growth and

fundamentals

Divergent response(reaction function)

to rising inflation

The Federal Reserveis leading the w

ay

Other

House prices

What factor will be decisive for the Riksbank to begin to diverge from the ECB's monetary policy?


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28 28

005101520253035404550

Yes, inflation is justabove the central

banks' targets, butdeclines within 1-2

years

Yes, inflation at ahigher level for years

to come

These are onlytemporary supply

effects, the centralbanks "only" need to

see through thisrelatively short period

The rise in inflation istemporary and the

risks are on thedownside after a

period of excessiveasset inflation.

What is your assessment of the risk that the rise in inflation will be more permanent?



High cost of commodities and electricity. Our “hot topic” question regarding high commodity and electricity prices supports the notion already shown in the SEK drivers section, which indicated a falling risk appetite and a more uncertain recovery. The largest share of respondents expects high raw material and energy prices to lead to higher costs for consumers and thus reduced consumption. That would be a headwind for growth which otherwise is expected to increase when restrictions are lifted which would normally provide a boost for private consumption. If the concerns for growth become large enough it could make central banks normalise rates at a later time, which would weigh on currencies such as the USD, NOK, CAD, GBP and NZD as they have been strongly supported by the market expecting their central banks to be early in normalising rates.

However, the second most common answer is that high commodity and electricity prices will lead to higher inflation (without having much of an impact on growth). This could instead trigger earlier or more frequent rate hikes which would support the same currencies named above.

Our research materials can also be found on 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.

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Higher costs forconsumers and thus

less for otherconsumption

Higher costs for inputgoods that can betransferred to thecustomer (more

inflation)

Higher costs for inputgoods that cannot be

transferred to thecustomer (lower

margins)

Higher costs forconsumers and thus

rising wages andmaintained

consumption

High raw material and energy prices… what can it lead to?Share of respondents, %


SEK Flow analysis Wednesday, October 20, 2021

Is SEK suffering from structural outflows? In every SEK Views report, we look further into the developments of the underlying FX flows driving the exchange rate. Since the start of 2021, we have remained neutral on EUR/SEK, expecting sideways trading; longer-term forecasts, however, remain SEK positive, although we only project a few percent of appreciation. Traditionally, SEK is held as a growth-dependent currency, hence global developments in 2021 should have been very constructive. However, as we have labelled “structural outflows”, there are developments in the Swedish balance of payments that make us less constructive, despite an attractive SEK valuation.

Carl Hammer Phone: +46 70 302 6128 [email protected] Olle Holmgren Phone: +46 70 763 8079 [email protected]

During the past five six years, SEB Research has run the idea of Sweden developing into a surplus net creditor country with a structurally high financial savings, a strong balance sheet and surplus of assets abroad. Our research has also concluded that Sweden has accumulated assets at a stronger pace than what the official statistics show; indeed, in the past few years, the net international investment position for Sweden has been marked up substantially by Statistics Sweden and increased to 80%/GDP when valuing foreign direct investments at market rather than book value. Moving into the category of a very solid surplus has made us believe we should see SEK being traded more as a risk-appetite- and business-cycle-neutral currency vs the previous market consensus of having strong positive correlation with risk appetite. To some extent, this theory was vindicated during the pandemic, as global GDP contracted by the most since WW II and yet SEK was the strongest developing G10 currency last year. Although the prime driver was probably the USD weakness following rate cuts by the Federal reserve, SEK nevertheless performed surprisingly strongly. This also had FX hedge implications for domestic asset managers and companies normally expecting SEK to be weak in such an adverse scenario (running more open FX exposure). Our conclusion therefore is that we should no longer count on SEK following either risk appetite or the business cycle with any precision. We also think that should Sweden continue to accumulate large current account surpluses, we will continue to have low interest rates and likely a preference for investment abroad, which bodes badly for SEK suffering from what we call structural outflows.

Real trade-weighted SEK falling; net investment position improving for the government




Strong savings make financial outflows; low interest rate environment magnifies developments In a paper recently released (see section below for more on this), the central bank of Sweden asked whether the relationship between the current account (C/A) and the exchange rate has broken down. The background to the paper came after Sweden had seen a continued downtrend in the real effective exchange rate since 1994, almost regardless of what happened with the C/A. The Riksbank concluded that periods of declining C/A surplus (i.e. less negative balance in the financial account, as in 2009-18) should have been met with less downside pressure on the currency.

There are several reasons why the short-to-medium-term swings in the current account will have small (if not negligible) effects on the currency, primarily because the actual (trade-related) flows are so small in comparison to capital market flows. As an example, the global FX market turnover, according to BIS, is close to USD 6 000bn every day, which means that FX flows are equivalent to total annual global export/import trade flows every three days. It is also not obvious exactly how the C/A should affect the currency: traditionally, C/A surplus countries are supposed to get a tailwind for their currency as export revenues are exchanged back into their domestic currencies – that’s how economists would reason when it comes to the C/A balance and the effect on the exchange rate.

The Swedish C/A development has seen different stages (see chapter on Riksbank article too): strong gains in 1995-2007 and then a setback in 2009-18. In recent years, the surplus has increased quite substantially again. Despite large increases in household’s savings since 2000, the current account surplus declined steadily during 2009-18, driven by lower savings by private companies. We have previously concluded that strong domestic demand increased investment, primarily in residential buildings, and overall savings dropped as a consequence in 2015-18. We think the same trends are possible in the coming years, making a probable case for lower savings and a lesser drag on the exchange rate.

The current account is equal to financial savings in a country. Savings can in turn be broken down into sectors in the economy (e.g. government, private companies and households). Depending on what sectors increase/decrease savings, the outcome for the currency can vary: as a country’s population grows older, savings increase in order to cater for retirement, which in turn lowers demand, inflation and also interest rates. Weak domestic returns likely push savings abroad to in order to get the highest possible returns. Looking at the different sectors and their contribution to savings produces some interesting findings. Following the crisis in the early 1990s, Sweden implemented a government budget rule, meaning the state public budget should show a surplus of 1% over the business cycle (the rule was changed recently to only a 0.33% surplus). Since then, government budget developments have been superior to many other countries, where the government has run continued deficits, causing debt/GDP to increase. This is quite remarkable (see graph below), as the Swedish government sector has a negative net financial liability, meaning that government financial assets exceed government debt. Outside of the scope of this article, this yields significant room for state investments ahead, such as green investments for sustainability purposes, for example.

As regards the government, there are other interesting aspects of savings and investment. When looking at the net investment position for the central government, we note that coinciding with the introduction of quantitative easing in Sweden (by Riksbank) in early 2015, the NIIP has decreased by SEK 400bn. This is a consequence of nationalising Swedish debt, as foreign investors have left the Swedish government bond market. Furthermore, the Riksbank is currently printing SEK 60bn of new SEK in order to repay a loan from the national debt office to the currency reserve. The repayment of maturing government FX bonds creates an outflow of SEK 60bn per year and means that foreign holdings of government debt are likely to continue to decrease until the end of 2023. That the Swedish central government budget is expected to show a surplus in 2022 and 2023 will also contribute to this trend.


Swedish net portfolio flows: net equity flows are SEK positive in times of falling risk appetite

Source: Swedish Statistics

Large domestic savings (large C/A surplus) in combination with a large positive net investment position in both FDI and in equities make net equity portfolio flows a sizable flow factor for the Swedish krona. The tendency for net equity flows is countercyclical in its nature, meaning that in times of strong risk appetite and abundant savings not finding suitable returns in Sweden, net equity flows are SEK negative leaving Sweden. This development has been very clear during the pandemic, as Sweden has net purchased SEK +500bn worth of foreign equities, or 10% of GDP, which supersedes the C/A surplus during that time.

The essence of our label “structural outflows”. Since floating the Swedish krona some 29 years ago, Sweden has had a falling real effective exchange rate and persistent and relatively large C/A surpluses. In the past 10 years, the Riksbank has had a strong preference for conducting monetary policy in sync with the ECB. Low and even negative interest rates have been combined with quantitative easing, even when the economy has done really well, as in 2016-18. This period saw decreasing C/A surpluses, but SEK did not benefit, as the Riksbank purchased bonds from foreign investors and the government continued to amortise foreign debt. The one-sided FX intervention mandate by the Riksbank further fuelled SEK developments as a funding currency (very low interest rates with a one-sided view on the SEK not permitted to trade higher). The low interest rates in Sweden made investments more appealing abroad and companies did not want to sit with excess reserves in SEK, where deposits came with a penalty (negative interest rates). Excess savings, low returns, QE purchases and ample liquidity made SEK an unwanted currency among Swedish and foreign accounts. Hence, if Sweden continues to have “excessive”/high savings and little interest from private, professional and companies to invest at home (where interest rates are low), then SEK will continue to suffer from those outflows, making additional large appreciation unlikely.

Deposits are rising fast and the rate spread to the euro area is turning SEK positive

What could be changed to increase SEK attractiveness? Ultimately, relative central bank policy and interest rate levels will determine the fortune for most currencies, including SEK (in our long-term fair value model terms of trade and relative ULC are also included). There are a few different scenarios worth highlighting. The low debt/GDP calls for room for more loose fiscal policy to boost activity in Sweden. This could in turn raise resource utilisation/inflation and the Riksbank would find it necessary to raise interest rates and SEK would be more attractive to place funds in. Using low debt/GDP to boost growth, pushing the repo rate higher and making the Riksbank deviate from the ECB would surely push EUR/SEK down towards 9.00 again. Sweden could also impose a homeland investment act to attract funds back on-shore through favourable tax treatment. This proposal would be aimed at getting companies to invest in Sweden rather than abroad, as the US did in 2005. Obviously, both of those examples remain unlikely and hence in the absence of the Swedish government pursuing a more aggressive growth agenda, lower domestic savings and also pushing higher growth/inflation, EUR/SEK will continue to trade around 10.00. For 9.00 to be reachable, interest rates must increase in Sweden and deviate from the ECB’s (plus lower outflows, as savings are used in Sweden to boost investments).

minus = minskat innehav 2015Q3 2015Q4 2016 2017 2018 2019 2020Q1 2020 2021Q1 2021Q2

Net Portfolio Flows 72,9 -117,1 50,3 27,6 -87,9 104,5 -103,3 25,7 158,6 78,7

Stocks and shares -14,9 -67,5 104,6 122,2 -42,8 68,8 -93,2 181,8 82,6 45,8

Swedish Shares -10,1 -7,4 -25,7 27,7 -0,5 10,9 8,8 66,5 17,4 39,9

Foreign Shares -25,0 -74,9 78,8 149,8 -43,4 79,7 -84,4 248,1 100,0 85,7

Debt securities 87,8 -49,6 -54,4 -94,6 -45,0 35,7 -10,2 -156,2 76,0 32,9

Swedish debt sec. -109,8 55,6 3,8 196,9 38,1 -30,4 -46,4 65,2 -46,9 -11,6

Foreign debt sec. -22,0 6,0 -50,7 102,4 -7,0 5,3 -56,6 -91,1 29,1 21,3

MXWO -9.7% 2.0% 5.2% 21.1% -10.4% 25.0% -21.1% 14.5% (44) 4.6% 7.5%


Riksbank paper finds evidence for weaker underlying flows In April 2021, the Riksbank published a paper: Exchange rate and balance of payments – a correlation that got lost? In this paper, the Riksbank looks at the real effective exchange rate and its steady decline ever since the currency was floated back in the 1990s. What is striking is that the decline is combined with periods of large current account surpluses. Two periods are identified: 1) 1992-2007 and 2) 2008-18. Before 1992, Sweden ran chronic current account deficits, which culminated in the balance of payment crisis in early 1990s and the SEK was ultimately floated. During 1992-2007, the deficits were turned into sizable surpluses and Sweden started to amortise the sizable foreign debt. As savings surpluses were accumulated, the financial account turned into a large deficit and, logically, SEK continued its decline and depreciated. The relationships can be described as follows: higher savings (e.g. for pension requirements) and lower consumption leads to lower inflation and lower interest rates, in turn weakening the exchange rate. Alternatively, weaker relative productivity or terms of trade lead to a weaker real exchange rate.

During the second period, the continued decline in the trade-weighted SEK is much harder to explain. Looking through the impact of the financial crisis, Sweden started to boost its domestic demand through elevated residential investments and the current account surplus fell from 6-8% of GDP down to 2% in 2018. A lower savings surplus in Sweden equals funds staying on domestic soil for domestic purposes, hence the period of large financial outflows abated significantly. Yet the SEK continued its steady decline to our and others’ surprise. We have already made a significant effort in trying to explain these developments and our conclusion points to a few factors related to the introduction of non-conventional monetary policy by the Riksbank (e.g. negative interest rate, quantitative easing and the instruction of a one-sided currency intervention mandate; more below).

In the Riksbank’s paper, the authors highlight a few factors which may or may not explain the continued weakness: 1) Foreign investors left the Swedish bond market as the Riksbank started to purchase Swedish government bonds; however, the Riksbank notes that the while foreign investors sold SEK 218bn, they net bought covered bonds; 2) SEK suffered from carry trades as interest rate differentials turned more negative vs USD, GBP and at the short end of the curve even the EUR, giving a notable disadvantage for the krona. Assessing how large outflows from carry trades are is difficult, as the transactions often include derivatives and the financial sector, which are difficult to measure in the BOP statistics. Still, in our view, it is probable that the negative rate spread was a strong headwind for the SEK, especially when combined with outflows of government bonds, driven by strong government finances and the Riksbank’s purchases.

So, decreased financial savings during 2008-18 did not turn around the trend for a weaker SEK. The Riksbank instead concludes in its paper some factors which may work to weaken the relationship between the exchange rate and the balance of payments/current account: 1) Dominant currencies: the IMF has produced data on several countries’ foreign trade, broken down by currency and trading partner, and found that both exports and imports invoiced in USD are greater than the actual exports to, and imports from, the United States. This applies to Sweden and means that invoicing in global currencies among Swedish companies can to an increasing extent weaken the impact of exchange rate movements on the Swedish current account. 2) Global value chains: countries are to an increasing extent finding themselves in an international goods production chain, where input goods are imported into one country, then processed, refined, and exported to the next stage of the production process, meaning that export incomes and import costs often vary in the same direction when the exchange rate varies. This can lead to the current account net balance being less sensitive to exchange rate fluctuations. In 2016, the foreign value-added share of total exports was around 20 percent. 3) Re-export: Re-exports involve imports of goods to Sweden that are then exported abroad without any further processing. For instance, Swedish trading companies may have stocks in Sweden for imported goods that are then sent abroad to be sold on. Exports of goods increased in volume by more than 43 percent in Sweden between 2000 and 2018. At the same time, goods production only increased by 5 percent.

Relative real interest rate developments remain SEK supportive FX developments during and after the pandemic have centred around the USD cycle up or down, as is normal in the FX market. The greenback is present in 9 out of 10 FX transactions, global debts are denominated 50% in USDs, and US equity markets have the same share of total equity market capitalisation. Hence, the USD will always set the overall tone for the remaining G10 currencies. Historically, in times of USD strength, the SEK has underperformed a falling EUR and vice versa; when the USD is weak, SEK outperforms a stronger EUR. Developments since the pandemic hit global markets can be divided in two periods: when the USD fell (April to December 2020) and then turned stronger (in 2021). The US has done its outmost to bring the economy to full resource utilisation, boosting growth through debt-driven expansion. The FX market has overlooked this very negative USD development and instead has anticipated monetary policy tightening by the Fed. As long as


forward curves are pricing Fed tightening, the FX market is likely to overlook weak underlying fundamentals, but should the Fed clearly indicate rate hikes are distant, we are convinced there will be another round of EUR/USD strength up to 1.20-1.25 for starters. This will also push USD/SEK back to the low 8 and potentially below, which would also contribute to a weaker EUR/SEK. Hence the USD cycle will have the deciding impact on SEK as long as the Riksbank refrains from hiking interest rates.

Real interest rate spread indicative of large SEK upside. SEK cycle inverted to the fortunes of USD.

SEK valuation is still somewhat appealing to investors Our long-term fair value model signals that SEK remains undervalued. The model is based on relative prices (PPP) (-), relative terms of trade (+), relative ULC (-) and real long-term interest rate differentials (+). The model output has been stable over recent years; other measures of FX valuation, such as relative developments in unit labour costs, are indicative of Sweden losing its rate of competitiveness against the eurozone. Looking at trade patterns, Sweden runs a large trade deficit towards the eurozone. Hence, it is not obvious that EUR/SEK is overvalued, but staying faithful to our long-term fair value model, we think there is some (albeit small) room for SEK appreciation based on the argument of valuation.

The SEK remains undervalued, according to our models

Source: SEB calculation, Macrobond

Conclusion SEK is slightly undervalued but is hampered by weak interest among domestic and foreign companies and asset managers to choose the currency. Continued excess savings and low interest rates on a par with the ECB make us less convinced about EUR/SEK returning all the way down to the low of 9.00 or even close to our current long-term fair value estimate of 9.64. As we have written in the article on the Riksbank, deviating monetary policy would ensure a stronger currency and the prospect for that to happen is a higher inflation rate vis a vi the eurozone or a significantly weaker USD (as a result of the Fed not hiking interest rates as planned/priced by markets in 2022).


Riksbank policy outlook Wednesday, October 20, 2021

Can the Riksbank deviate from ECB? - inflation rules ! According our investor survey ahead of the Riksbank’s September meeting a majority of the respondents (54%) say that the Riksbank’s monetary policy is the most important reason why EUR/SEK remains stuck above 10.00. We share this view and see only marginal scope for krona appreciation as long as the Riksbank keeps the repo rate at zero. We expect both the Riksbank and ECB to keep rates unchanged until the end of 2023 (the current forecasting horizon) and this is the most important reason we are predicting EUR/SEK to trade around 10.00 over the next 12 months. In this article we discuss scenarios that could change the outlook and make Riksbank deviate from ECB.

Olle Holmgren Phone: +46 70 763 8079 [email protected]

Our conclusion is that core inflation needs to be at least 0.5-1% higher than our forecast over the next 12-24 months to trigger the rate hikes priced by the market. The spread for core inflation in Sweden and the euro zone has except on a few occasions shown similar trends and deviations have tended to be explained by shifts in the SEK exchange rate. Without a large shift in the exchange rate, we think a large deviation between core inflation in Sweden and the euro area is unlikely. However, a possible upside risk for Sweden is that the Riksbank includes food in the preferred core inflation measure which makes Swedish core inflation more exposed to international price movements on food commodities, which have increased in 2021.

In a high inflation scenario, we expect the Riksbank to be slightly more apt to hike rates than the ECB, but this is far from clear-cut and is based mainly on the Riksbank’s history to be more committed to react to deviations from the inflation target. The euro area is of course sensitive to rising rates, but even more so to higher intra euro spreads. This could make the ECB prefer rate hikes rather than reducing asset purchases if policy needs to be tightened. Lack of supply of government bonds and an aversion to purchasing covered bonds would make the Riksbank more apt to reduce QE purchases if policy needs to be tightened.

How much can Swedish inflation deviate from the euro area? Looking at year-on-year changes, the inflation rates for core CPI (ex food, energy, alcohol and tobacco) in Sweden and the euro area have at the most deviated slightly more than 1pp over the last 20 years. Monthly correlation is only 0.33 but core inflation rates in Sweden and the euro area have not been very far apart for a long period of time. Looking at trends, deviations in the inflation rate have tended to be relatively persistent. The chart below shows 2 year moving averages spread between Swedish and euro area core inflation. The inflation spread was lowest at -0.8pp in 2008-2009, while the highest spread has been seen over the last 4-5 years, when Swedish inflation has trended 0.3-0.4pp above the euro area. Most deviations seem to be explained by exchange rate movements, which explains most of the higher Swedish inflation in 2015-2020. Interestingly, the exchange rate currently indicates that the inflation trend will tighten. The trend for core inflation in the euro area has gradually declined and has stabilised at 1% y/y over the last 5-10 years. Swedish CPIF ex food and energy has on average been slightly over 1% y/y since 2000, which is marginally higher for the euro area. This highlights that Swedish core inflation is very closely linked to the euro area and as long as we do not see a structural shift the spread is likely to remain low, at least as long as we don’t have a significant movement in the Swedish exchange rate. We continue to see sharp exchange rate movements as the most probable trigger for the Riksbank deviating from the ECB, although a large shift by at least 10% would be needed given that the current trends for core inflation persist.



Swedish core inflation includes food – near-term risk for larger monetary tightening by the Riksbank

One factor that potentially could put more pressure on the Riksbank in a high inflation scenario is that the bank has chosen CPIF ex energy as the main core measure rather than CPI ex food, energy alcohol and tobacco, which is used in the euro zone. Food prices are currently lowering the inflation rate in Sweden, but global food commodity prices have increased markedly in the first half of this year and food prices are likely to accelerate over the next 6-9 months. As illustrated in the chart below, CPIF ex energy increased at a significantly higher pace in 2007 and 2008 than when food was excluded.

We expect the difference between the two core measures to stay around 0.2-0.3pp in 2022, but uncertainty regarding the pass-through from commodity prices is uncertain. Still, the correlation between Swedish and euro area food inflation is relatively high, when corrected for exchange rate movements and the response from the central banks would depend on whether the Riksbank sticks to using CPIF ex energy as the main core measure. If Swedish CPI food price growth accelerates to 7-8% in 2022 instead of the 3-4% we currently predict, then risks for more rate hikes from the Riksbank would increase.

The Riksbank – even more obsessed with inflation

Both the ECB and the Riksbank have historically been fundamentalist pursuers of inflation targets, often reacting to moves in spot inflation when driven also by external and temporary drivers such as energy and food. However, after the global financial crisis, both central banks have shifted focus towards core inflation and in different ways signaled that inflation will be allowed to overshoot target for a period of time. The Riksbank has been slightly more specific with more outspoken board members indicating that an overshoot of 2% for core inflation over one year will not trigger any


policy tightening and saying that policy should not be tightened before inflation threatens to be materially and consistently higher than the target. The ECB recently changed the inflation target to be symmetrical around 2%, saying deviations on the up and downside are equally undesirable. Hence, the bar for early rate hikes is likely to be high for both central banks and a probable scenario is that core inflation needs to rise towards 3% and remain there for a year before a rate hike will be considered. Although most board members have been less explicit regarding the tolerance for an inflation overshoot, we think that inflation needs to overshoot the target by 0.5-1% over at least 12 months before the Riksbank and ECB deliver rate hikes.

In the slightly longer term, we think that the Riksbank will be more apt to tighten policy in a high inflation scenario. This is not a clear-cut conclusion but the Riksbank’s extremely expansionary monetary policy during 2015-2018 with rates below zero, a large QE programme and a mandate to intervene in the currency market, despite this being a period of strong growth, declining unemployment and sharply higher prices in residential housing, highlight that the Riksbank’s commitment to strictly adhere to the inflation targeting is stronger. A possible risk for this assessment is the elevated Swedish home prices and risks for falling prices when rates rise. In the euro area, the ECB’s policy will probably be hampered by the risk of rising intra-euro spreads, which is likely to make many ECB board members from especially southern Europe reluctant to tighten policy. Still, the main priority for the ECB is likely to keep intra-euro rate spreads low. This suggests that the ECB could prefer raising rates rather than reducing QE as a first measure if policy needs to be tightened. This means that the Riksbank’s perceived stronger commitment to the inflation target will have a limited effect on the policy rate spread.


SEK Flow analysis Wednesday, October 20, 2021

Near-term flows to support SEK This year there has been a record number of Swedish IPOs. Some large took place in early October, others dominated by Volvo Cars AB look set to take place in the near future. We expect IPO-related SEK inflows to continue to support SEK over the coming weeks. Comparisons of the changes in SEK positioning stated in the SEK Views survey and our own SEB flows shows that our flows: (1) do not falsify the scaling down of the SEK overweight stated by financial institutions; (2) supports the notion of the increased SEK underweight by companies; and (3) supports the thesis that the market in general has net sold SEK, though to a quite a small extent. Finally, we discuss seasonality in this report: we expect the otherwise robust SEK weakness in October to be mostly a ghost of the past, while we still see some scope for the traditional SEK strengthening in December.

Filip Carlsson Phone: +46 70 462 2042 [email protected] Karl Steiner Phone: +46 70 3323104 [email protected]

IPO and dividend flows In October and November, there are more Swedish equity-related flows than usual, with both dividend payouts and IPOs, which most certainly will have an impact on the SEK. Below we describe the scheduled flows in more detail.

From the OMX30, there are eight planned dividends to be paid out in SEK before the end of November. The total amounts distributed is estimated to SEK 35.3bn, of which SEK 21.4bn is for Swedish investors. The remaining SEK 13.9bn hence is paid to foreign owners and 80% is assumed to be reinvested. That is, an outflow of SEK 2.79bn is expected before the end of November.

On 12 October, Nordea paid a dividend of EUR 2.92bn. Swedish investors own 28.8% of the shares, which sums up to EUR 0.84bn, or about SEK 8.5bn. That could be one of the causes of SEK strength in the following days, as EUR/SEK fell by over 1.0% and traded below 10.00 temporarily for the first time since February 2018. While this increases the risk that the krona may bounce when the flows stop, Nordea has also received approval from the ECB for a share buyback of up to EUR 2.0bn. The buyback programme is expected to be initiated after the release of the Q3 results, due on 21 October. That is, Nordea’s total capital distributions to shareholder during the autumn is expected to be about EUR 4.9bn.

Source: SEB, Bloomberg

Looking at IPOs with recent or near-term effective dates, a total offer size of about SEK 63bn occurs in October and November. IPOs of about SEK 30bn occurred in the first part of October, and the IPO of Volvo Cars AB at an offer size of about SEK 32bn stands for the major part of the remainder. With the assumption of 40% foreign ownership, as for the stock market in general, the IPOs will generate about SEK 25bn in SEK inflows (i.e. SEK buying) with SEK 13bn remaining. Keep in mind that the inflow is in connection to the IPO. In the case of Volvo Cars AB, which has foreign owners, it can be difficult to estimate the portion of SEK that will be reinvested or the amount that will flow out in the longer term.

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Nordea’s dividend in EUR and the IPOs of the autumn/winter generate SEK buying, while a dividend paying out in SEK generates SEK selling. With an expected upcoming inflow of about SEK 21.5bn and an outflow of about SEK 2.79bn, flows from IPOs and dividends are overall positive for SEK strength.

SEB internal SEK flows: stated versus revealed preference As usual, we have studied our own flows for different client categories in order to check if market positioning is in line with the stated preference in the FX survey. In short, we think it is difficult to find support or falsify the small downscaling of the SEK overweight reported by financial institutions. The sharper addition to corporates’ SEK underweight seems more supported by our flows, especially when looking at flows between USD/SEK. Finally, the switch from a SEK overweight to a small underweight perceived by the respondents to have occurred in the general market is supported by our proxy for foreign positioning in EUR/USD.

Own positioning

Domestic institutions indicated in the survey that they have continued to scale down on the record SEK overweight since April from the survey one year ago. Looking at the monthly flows versus USD, it supports the notion of building an overweighted SEK position during January to October 2020. That is not followed by much SEK selling, but at least less SEK buying, partly supporting a smaller SEK overweight in April 2021. Since then, there has mostly been net SEK buying, but low volumes, and two months of SEK selling, where October stands out as the more pronounced SEK selling months. Focusing instead on flows versus the EUR, it becomes clearer that the large SEK overweight was scaled down between October 2020 and March 2021. Since then, the picture is more mixed. All in all, the change in institutional positioning was small and nothing large really stands out in the flows since the previous survey in April. So maybe not clear confirmation in revealing preferences to those stated in the survey, but, on the other hand, nothing that falsifies it either.

Source: SEB

Domestic corporates tend to be notorious net SEK buyers, but are clearly underweight SEK at the moment, according to the survey. Looking at the period since the previous survey in April, there seems to have been continuous SEK buying in quite large volumes, which does not support the survey’s notion of an underweight. On the other hand, looking at the flow versus USD, there is support for the notion as there are three months with clear SEK selling and two with large volume. Thus, there seems to be at least some support for the stated preference based on our flow analysis.

Source: SEB

Market positioning The survey participants believe that the market as a whole has scaled down slightly from the small SEK overweight of +7% shown in the previous survey and are now underweighted by -2%. Using our client flow from international financials as a proxy for the market in general supports this notion, as can be seen in the chart below. The green line is the aggregated international financial positioning, which is higher now compared to in April, which indicates slight net SEK selling and EUR buying.

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Domestic corporatesNet selling/buying SEK versus EUR



Source: SEB, Bloomberg

SEK seasonality: October ghost dead – what about December? There has been a very robust pattern in October in which EUR/SEK has risen almost every year since 2003 (all but three to be exact). However, the SEK October ghost seems to be dead, which is what we thought in last year’s October SEK Views and in 2020 EUR/SEK managed to fall for the first time since 2011. This year seems to repeat the effort, with EUR/SEK so far having fallen by 0.9%.

The question is then: what will happen to the two other seasonal patterns that tend to occur in EUR/SEK during H2? First, there is the tendency for EUR/SEK to head higher from mid- to end-November and the first two weeks of December ahead of (and just after) the PPM flows. Then there is the tendency for EUR/SEK to subsequently head lower and on a monthly basis fall in December. As regards those seasonal patterns, we will come back with a more detailed analysis later, but the short story is that the rise ahead of the PPM flows has been less and less pronounced in recent years, while the fall for the entire month has remained solid. Thus, the seasonal pattern to focus on is lower EUR/SEK in December. However, as there seems to be less impact from the SEK weakening pattern in October, which tends to be supported by lower STIBOR, there could also be a smaller strengthening impact in December, as the correction higher in STIBOR might not materialise as usual. Also, some of the strengthening in December lately has come after the Riksbank’s rate decision in December (e.g. in 2019, the Riksbank lifted the rate and continued its experiment with negative rates). Thus, if one does not expect the Riksbank to deliver hawkish news in this year’s November meeting, then the SEK appreciation should not be expected to be very large.

EUR/SEK monthly change (%): Source, SEB, Bloomberg

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Offshore financials positioning vs EUR/SEK

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Year Change (%) Year Change (%)2003 0.5 2013 1.22004 0.2 2014 1.62005 2.4 2015 0.42006 -0.8 2016 2.92007 0.2 2017 1.42008 1.3 2018 0.52009 2.5 2019 0.42010 1.2 2020 -1.32011 -2.1 2021* -1.12012 1.8 * as of 19 Oct 2021

Year Change (%)2009 -2.02010 -1.52011 -2.02012 -0.82013 -0.62014 1.82015 -0.52016 -2.12017 -1.42018 -1.52019 -0.52020 -1.8

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