FxWirePro: Scandinavian crosses surge against euro despite German and Italian upbeat numbers, likely to appreciate further - Options trade perspectives

There’s a bit of a Northern European ‘thing’ going on at the top of the FX rankings this week. The SEK takes the top place, from a distance, mostly on the back of strong Q2 GDP data released on Friday.

Swedish growth accelerated to 1.7% from the first quarter, versus a consensus estimate of 0.9%. This has fed growing expectation of Riksbank policy normalization.

Well, that really was a positive surprise. Statistics Sweden announced on Friday that in Q2 GDP had risen by 4% against Q2/2016. The majority of analysts had expected a rise close to 2.7%. As a result, the Swedish krona was able to appreciate heavily on Friday. Regardless of whether one believes that the inflation process is disrupted or not: with strong growth like this it will be difficult for the majority of FX market participants to imagine that inflation will not rise notably (CPI +1.7% YoY). As a result, hardly anyone will be able to imagine that Riksbank will not return to a path of monetary policy normalization in the foreseeable future.

The ECB is facing a policy dilemma with the strong euro, and that boosts the relative appeal of the Northern European currencies. NOK has been helped by higher oil prices, but HUF, PLN, and even GBP have outperformed the euro.

We wonder where economists 15 years ago would have expected inflation to stand in view of negative interest rates and growth of 4% about? As a result, the medium term SEK optimism is expected but warn against expecting rapid easy gains.

Polish inflation was anyway going slow and now, softer energy prices are driving inflation slower: latest weekly fuel price data suggest that the energy component of CPI will be down a further 0.9% MoM in July, after declining by 4% MoM in June. At this time, energy prices are no longer adding to the year-on-year inflation rate as they had done during Q1. So our point here is that, unlike in Q1, we see no sustained source of imported inflation any longer.

In a fundamental sense, our calculations show that Polish core inflation is running significantly slower than 2%, compared with NBP's target of 2.5%. This is a primary reason why we should not expect any rate hike from NBP over the coming year, as Eryk Loh, the member of the monetary policy committee, pointed out again recently. We see EURPLN hovering around the current 4.29 level through the end of the year.

At the same time Draghi underlined also that the ECB had to be very prudent and that the exit from the expansionary monetary policy would have to be very slow. A reference to the forward guidance was also included. Draghi’s speech provided wings to the euro, by now EURUSD is trading above 1.1350.

EUR-cross vols should be more muted in H2 as data momentum and investor focus on Europe cools.

At spot reference of EURSEK: 9.5435, buy 2M 25D EUR call switches in EURUSD vs EURPLN and sell EURNOK – EURSEK correlations via a vanilla option triangle.

Elsewhere, at spot reference of EURPLN: 4.2542, we advocate entering a new EURPLN 1w1m diagonal call spread (4.2850/4.20). The underlying spot FX trend and IVs are favorable to write ITM calls.