Macro and Vol Commentary
The European economy continues to drag against major currencies, most notably the USD; however, Sweden is also on shaky ground, which clouds the outlook.
- Consumer confidence in Sweden dropped from 71.3 to 65.5 in June, as household consumption grew slower in May at 5.2%, down from a revised 8.8%.
- The M/M change was 0.7% in May, and we see this continuing to trend lower as consumption declines and inflationary pressure rises.
- Retail sales are negative, falling 0.6% M/M and -2.3% Y/Y in May. The decline in retail sales is indicative of rising living costs.
- Wages of non-manual workers increased 3% Y/Y in April, but this is significantly below inflation which stands at 7.3% Y/Y in May, with M/M gains at 1%.
- Inflation excluding energy is 5.4% Y/Y in May, with the CPIF data at 7.2%.
- The supply-chain pressure index from the Federal Reserve of New York has declined from the highs above 4 but now stands at 3. The index is based on transport costs and indicators for the manufacturing industry.
- In Sweden, almost 3/4s of all product groups have increased by 2%, and half have increased by 4%
- Pressures will likely remain above the target in 2023 before weaker consumption creates a new equilibrium.
- The economic tendency survey declined in June from a revised 110.3 to 105.9. The manufacturing index also declined after a strong reading in May. This continues to highlight that while currently performing, the Swedish economy will run out of steam in Q4 and 2023.
- PMIs are expansionary, with the manufacturing PMI at 53.7 in June, down from a revised 54.9, with employment, new orders, and delivery times all dragging the index.
- Manufacturing confidence stands at 120.6, down from 125.5
- Services and composite PMIs are still heavily in an expansionary territory at 62.8 and 60.3, respectively.
- Industrial orders are falling and declined 7.5% in May on a year-on-year basis and 5.5% on an M/M basis. Industrial production value grew at 0.2%, significantly lower than 6% in May from the private sector production.
- GDP indicator was 4.5% in May on a year-on-year basis, but 0.7% M/M.
- Unemployment has increased to 8.5% in May, higher than 8.2% the month prior. Labour demand is strong, but the trade unions are pushing for higher compensation, and this could lead to strikes, as we have seen in France UK and rising pressure in Germany.
- The Riksbank increased rates to 0.75% in their latest meeting to curb inflation, and rates will be closed to 2% by the end of the year.
- Riksbank will reduce its asset holdings faster than previously decided in April.
- The lending rate stands at 0.85%, and the liquidity facility rate is at 1.50%
- We expect further monetary tightening in the coming months, but the 10yr yield for Sweden is relatively low at 1.354%.
- We will likely see the curve flatten as near-term rates rise, but economic growth fears cap gains in yields.
- This may cause a downside to rate hikes in Q4, as with other central banks, but the Riksbank has fewer meetings than other developed economies, which will undoubtedly be a factor.
Near-term sentiment does not favour the EUR, but the political instability from Sweden's entry to NATO and weakening economic data. European data is poor and will continue to decline, and with Swedish rates favourable, this could trigger gains for SEK in the longer run when sentiment falls in line with fundamentals. However, the market is more focused on the growth path, risks for high-beta currencies are high, and this has caused significant pressure on SEK in the immediate term. We expect risk sentiment to push back towards fundamentals in the long run in favour of SEK as the European economy heads into a very tricky winter with high energy costs and weaker consumption, and if employment weakens, this will prompt weakness in EUR. We favour building a short EURSEK position above 10.90 for a stronger Swedish economy relative to Europe in 2023.
(Sources: BOE, Swedish Public Employment Service, Statistics Sweden)
EURSEK volatility has been realising lower than implied over the last three months, with front-end ATM volatilities falling significantly (by the order of more than one Vol) over the same time period, and the long-end remaining relatively high. This drop in short-end volatilities comes at a time when market participants are concerned over long-term growth and fundamentals, rather than the short-term variables. In light of this, we favour entering a horizontal calendar spread, selling volatility over the short-end and buying volatility over the long-end of the curve.
EURSEK 1-month Implied and Realised Volatility
EURSEK Trade Idea
- Trade idea in 1m-3m
- Sell EURSEK Call, 10.74 Strike in EUR 15mio, Exp 09-08-2022 – Rec EUR 121K Circa
- Buy EURSEK Call, 10.74 Strike in EUR 15mio, Exp 07-10-2022 – Pay EUR 156K Circa
- Total structure Premium Net Pay EUR 35K Circa
USDBRL NDO Positioning Data 23/06/2022 - 30/06/2022
Volumes for the USDBRL NDO market declined in the week, the range continued to shift higher. Call options traded a range of 5.20-5.80 with puts in the immediate term virtually non-existent trading a 5-5.20 range. However, in August options trade q 4-80-5.25 range with very little upside cover in August. This suggests in the coming weeks spot could rally further but then in August we could get a correction, unless these options are being granted to gain a premium.
USDBRL NDO Positioning Data 30/06/2022 - 07/07/2022
USDCNY Vanilla Positioning Data 23/06/2022 - 30/06/2022
The options market shows less volume and are focused around 6.70/ There is a mild preference for upside exposure with call options traded densely between 6.70-6.90 and then thins out. Downside exposure is weak with puts traded to 6.60. Longer term market volume suggests that USDCNY will rally further in the near term.
USDCNY Vanilla Positioning Data 30/06/2022 - 07/07/2022
EURSEK Vanilla Positioning Data 07/05/2022 - 07/06/2022
EURSEK volume is thin, and the majority of options favour the downside with puts trading down to 10.20. The range in Chart 2 is marginally lower with a few options due to expire in August with a strike between 10-10.20. Upside cover stops at 11 in Chart 2 and this suggests we could see the market edge higher as these trades have a higher notional value suggesting more conviction.
EURSEK Vanilla Positioning Data 07/06/2022 - 07/07/2022
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Key Events & Releases
JP Morgan Global FX Volatility
The index has improved so far this week, but resistance at 11.68 forced the index to fall below 100 MA to 11.19. The stochastics are falling, with %K now in the oversold, and the MACD diff is negative and diverging, suggesting we could see the index push lower in the near term. The index needs to hold above 50 MA at 11.15 before targeting 11.50 once again. The reaffirmation of near-term support at the moving averages would suggest we could see the market push higher. On the downside, confirmation of resistance of MA at 11.27 could trigger a break of support at 50 MA before 200 MA at 10.74. The moving averages created robust support levels, and to confirm the indicators, prices need to break the support of 50 DMA to confirm the outlook.
The index has rallied strongly this week, with protracted buying pressure prompting a break of resistance at 106 before testing 107.78 today. The indicators are showing further upside potential, with %K/%D about to converge on the upside near the overbought; MACD diff is negative and converging, with a buy signal on a horizon. The reaffirmation of support at 107 could set the scene for a break of resistance at 17.50. A break of this level would confirm the trend on the upside to 108. On the downside, if resistance at 107.5 holds firm and support at 106 breaks, this would set the scene for lower prices to 50 MA at 105.6. Long candle today, and indicators point to further upside in the near term.
The pair has weakened in recent days below the support level of 100 MA; the market closed at 10.69, finding support at 10.7. The fall below the 100 MA at 10.70 could pave the way for a challenge of 200 MA support at 10.61. The MACD diff is negative and converging, suggesting waning downside pressures for the prices. RSI has risen marginally higher, and %K stochastic broke above the %D – a buy signal, and is now edging out of the oversold. On the upside, the pair needs to gain a footing above 50 MA at 10.73, which could set the scene for 10.8. The indices point to a change of trend, and the bullish engulfing formation today confirms this outlook.