20 October 2019

FX weekly: The QE
train to… nowhere?
Martin Enlund | Joachim Bernhardsen | Andreas Steno Larsen

We worry about the QE psychology out there, but wonder how far, and where,
can the QE train really go if it’s not really QE? The NOK is weak, but a turn-
around looks more likely for 2020 than 2019. We enter a long EUR/SEK
position ahead of Riksbank.
If you want to receive a copy of FX weekly directly in your inbox, you can sign up via this link.

Quote of the day

Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.

# Riksbank Governor Ingves (not really - it’s from Sun Tzu in The Art of War)

Table 1: Our current convictions

The Fed’s new POMO program buying T-bills is a far cry from a new QE program, in our view. A normal QE
program would be launched because the central bank has run out of room to cut rates. A normal QE program
would entail the central bank telling us about its intentions to ease policy. A normal QE program would entail
the central bank trying to depress bond yields / push up asset prices. A normal QE program would also entail
the central bank buying riskier assets (i.e. greater duration). A normal QE program would also consistently
expand the amount of bank reserves/liquidity in the system. None of the above applies to the Fed’s current
POMO program…. At least not yet.

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Chart 1: If it really is QE, then higher yields and a rising global PMI could follow

But, as we suggested in the previous FX weekly, maybe we are misjudging the QE “psychology” here. Draghi’s
“whatever it takes” comments in 2012 weren’t credible (because of OMT’s reliance on united Euro-area
finance ministers – and the European debt crisis primarily reflects that the EA’s constituent countries can’t
agree), but that didn’t prevent the comments from triggering a positive reflexive loop in European bond
markets…

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Table 2: Initial read from new POMO operation dates USD-negative

According to some surveys, credit investors have breathed a sigh of relief now that the Fed is seen as “on
top” of the liquidity situation. What’s more, on the first two POMO days - when the Fed announced it is
pushing liquidity into the system – the USD weakened vs all but one G10 currency (the struggling NOK.
The recent move higher in equities may also been seen as supportive of the “this-is-QE” thesis, though we
think this is more likely to reflect positioning (the pain trade for macro hedge funds has been and remains
higher equities).

Among market participants there are also growing fears that the Fed will not be able to buy as many T-bills
as they are currently planning to buy, and if the Fed is forced further out on the curve, into US Treasuries, the
program becomes even more QE-like. All of the above adds grist to the mill for the this-is-QE crowd. But
we ask, how far can the QE train go if it’s not really QE? We think: not far...

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Chart 2: Drop in economic-political uncertainty is bad news for the trade-weighted USD

Rule, Britannia! GBP may need to correct even though hard Brexit is perceived as unlikely

The Brexit deal reached by BoJo and Juncker has recently been lowering perceived economic-political
uncertainty. This has been bad news for safe-havens and the USD (we have been stopped-out of our EUR/
USD short).

However, in light of this week-end’s events and BoJo’s (excessive) letter-writing, we think recent
Cable (GBP/USD) price-action may be overdone – especially the squeeze-like move higher close to 1.30
on Friday evening. A modest unwind of Friday’s move seems likely at the start of the new week, as market
participants await the EU’s response and another maybe more meaningful vote… To significantly dent the GBP
we would need hard Brexit odds rising. According to the latest PredicIt numbers, the likelihood of the UK
leaving the EU at the end of October has dropped to ~15%. These probabilities may be much too low if
BoJo's smile - which some commentators find "enigmatic" - hides some trick of sorts (e.g. the Orban playing
card as has been mentioned by some British tabloids). But enough with the tinfoil hattery...

We’re also not convinced that China & the US will be able to reach a deal later in November, if they don’t then
the trade-weighted dollar could get a re-boost. The leaders of the latter two countries may meet at the
APEC meeting November 16-17 in Santiago, Chile.

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Chart 3: CEO confidence suggests ISM non-manufacturing below 50 next spring

Growth outlook suggests it’s too early to underweight FX havens…

We earlier showed how US CEO confidence had plunged to recessionary levels, and when we have examined
this number further, we find that if anything it historically leads both ISM manufacturing (by one quarter) and
ISM non-manufacturing (by three quarters). Unless CEO confidence magically recovers in Q4, we may
be in for further bad news for global growth over the next few quarters (simple regressions suggests
ISM non-manufacturing at or below 50 by next spring and ISM manufacturing at ~46 in 2020). To us that
suggests it’s likely too early to underweight havens assets (in FX: USD, CHF, JPY vs the rest of G10).
(We think USD bears will do better shorting USD vs EM currencies such as the RUB - USD/RUB broke below
its uptrend last Friday).

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Chart 4: ISM/regionals divergence showed up as export orders collapsed

What’s more, while some economists have highlighted the GM strike as possible driver of the
divergence between regional surveys and the important ISM manufacturing gauge, we think the
China/US conflict is much more important. The divergence unfolded as the ISM exports orders component
crashed fairly soon after the breakdown in China/US talks this spring (this makes sense because of less
sensitivity to China in the the regions covered by the Philly & NY Fed surveys). In short, we expect economic
uncertainty to remain high, especially as US and global growth will likely slow further going into next
year.

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Chart 5: USD weakness vs G10 at odds with recent data

US growth expectations are being revised lower, but it’s not as if the rest of the world is improving - the US/
G10 surprise index spread is the widest since early 2018. To sum up, while we have been wrong-footed by
Brexit progress and the QE psychology over the past week or two, we are not yet ready to give up on our
view that the USD will remain strong over the next few months. It may be that a sizable amount of USD-
negativity has been priced-in by now.

SEK: krona made a come-back due to faulty statistics(!?)

The Swedish unemployment rate held at a surprisingly lofty 7.4% in seasonally adjusted terms in September,
consistent with the Riksbank being o by 0.5pp in its forecast from September. Alas, Statistics Sweden has
found out that its LFS statistics should not be trusted because of “deficiencies related to data collection”.
Revised – and hopefully more trustworthy - numbers will be released at some point, though we do not yet
know when. The lack of solid statistics means the Riksbank can easier argue whatever it wants at the
upcoming October meeting. This has been SEK-supportive.

Some investors now believe that the Riksbank has hit the "reversal rate", i.e. a too-low level of the policy rate
where its eects becomes counter-productive. This may well be true (at least one of the authors if this weekly
believes as much...), but we see no signs that the Riksbank believes this!

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Chart 6: Non-LFS indicators support the story of a significant weakening of the labour market

We also remain convinced that what we are seeing is a cyclical slowdown in the Swedish labour
market, and it is a larger slowdown than the Riksbank has expected. Other indicators such as registered
unemployed, vacancy data and households’ perceived risks of becoming unemployed corroborate the story of
a rapid (although probably not as rapid as the unemployment number suggests) weakening of the Swedish
labour market. See Sweden: The Labour Force Shule.

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Chart 7: Swedish surprise index extremely depressed still - hints at EUR/SEK above 11.0

While EUR/SEK has corrected lower over the past 10 days, helped by a decent inflation print and
faulty labour market statistics we are not interested in entering SEK longs. In terms of Swedish macro,
almost nothing can be found that cheers us up...

Weak domestic demand, weak external demand, unemployment rising, wage growth acceleration nowhere
to be seen, inflation expectations falling, global risks still on the downside, the Riksbank's krona-killing
machine still running, perennial communication mishaps by the Riksbank, negative PPM flows only some
~40 days away and a Riksbank which is likely to be dovish - we're not interested in buying SEK...  With the
sole exception of the rate hike in 2018 it has been a very good idea to pay a lot of attention to Deputy
Governor Jansson since 2013H2. Jansson usually gets the sta where he wants it to go, and where the
sta goes, Ingves follows. This is one reason why we expect the Riksbank to shelve its hiking plans at the
upcoming meeting. 

=> We enter a EUR/SEK long with target 10.92, s/l at 10.70 

The main positive risk we see for the SEK is if the USD cycle is turning earlier than we are currently
anticipating. If so, associated USD/SEK selling could drag EUR/SEK significantly lower. This is also one of the
positive factors we could identify for the NOK.

NOK: Why buy it?

EUR/NOK posted new all-time high this week as it crushed through the 10.1695 highs from December
2008. At levels above 10.22, EUR/NOK has not much to hold on to technically. We continue to advice caution

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
against the NOK, although measures such as RSI and our short-term model indicates that the cross is
overbought, in the very short term.

Chart 8: NOK weakening seems overdone, but we continue to be careful with the NOK

We’re going to be honest: It is hard to point to one single trigger for the recent NOK weakening. The S&P500
index has grinded higher over the last week. Uncertainty over both Brexit and the trade war remains, but
has surely been easing somewhat recently. This would usually be NOK-positive. However, players probably
have the Q4 seasonality in the back of their head and might be frontloading some of this (usually it doesn’t
materialize before November). NOK weakening has also been fueled by NOK/SEK-selling (a cross which has
been a very popular long in 2019).

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
Table 3: G10 FRA rates - NOK may be the 2nd highest yielding currency in December

Zooming out the underlying problem for the NOK is that there hasn’t been and aren't many good
arguments to buy it. The NOK has been trending weaker for years, making it an attractive bet for trend
followers. At the same time interest rates in Norway doesn’t yet look that high (why buy NOK in uncertain
times when you can buy e.g. the USD?). For a long time long USD/NOK has earned positive carry and the
position also likely gives you a hedge against the global economy being late in the cycle.

To turn the long-term trend in the NOK, it will likely have to become more expensive to be short the
NOK. We may also need signals that the global economy is picking up. This looks more likely to be a
2020 story than a 2019 story, in our view.

Our running track-record is always attached here.

Previous FX weeklies:

·FX weekly: The 50 B’s caused the downturn, so what about the 60 B’s? (13 Oct)

·FX weekly: Is everything falling apart? (6 Oct)

·FX weekly: A new path for USD liquidity  (29 Sep)

·FX weekly: Soft QE in October? (22 Sep)

·FX weekly: Welcome to the birthday party (15 Sep)

·FX weekly: An early santa rally (08 Sep)

·FX weekly: Can you smell the Sushi yet? (01 Sep)

·FX weekly: Mo taris, mo cuts, but who’s Sho Nu? (25 Aug)

·FX weekly: First havens, then sell confetti (18 Aug)

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
·FX weekly: The liquidity doom loop (11 Aug)

·FX weekly: Buy Treasuries. Short Scandis. Wear Diamonds (04 Aug)

·FX weekly: Lagarde better practice her Rhine dancing (28 Jul)

·FX weekly: Go big or go home (21 Jul)

·FX weekly: The liquidity plot thickens (14 Jul)

·FX weekly: e-scooters are silly (07Jul)

·FX weekly: One is exausted, the other is nuts(30 Jun)

·FX weekly: Time to bring in Steven Seagal #2 (23 Jun)

·FX weekly: Get ready for climate QE (16 Jun)

·FX weekly: Cut, cut,. cut, cut (09 Jun)

·FX weekly: The absolute madman! (02 Jun)

·FX weekly: Will Xi be Nikithar'ed? (26 May)

·FX weekly: Trade war ping pong (19 May)

·FX weekly: A stairway to heaven for Krona shorts (12 May)

·FX weekly: Mnuchin to bail-out Fed (05 May)

·FX weekly: 3 reasons why the USD has been resurgent (28 Apr)

·FX weekly: No doomsday (yet) (21 Apr)

·FX weekly: In EUR we trust (14 Apr)

·FX weekly: Crouching Tiger, Hidden Inflation Dragon (07 Apr)

·FX weekly: There is a smell of 2016 in the air (31 Mar)

·FX weekly: Dear Mr. Powell (24 Mar)

·FX weekly: The devils advocate (17 Mar)

·FX weekly: Mario Bla-blaghi (10 Mar)

·FX weekly: Chinese reflation (3 Mar)

·FX weekly: QT cannot run forever (24 Feb)

·FX weekly: The USD is now in Trumps hands (17 Feb)

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
·FX weekly: Time to care about Euro area politics again (10 Feb)

·FX weekly: Is Powell turning into a MAGA-man? (03 Feb)

·FX weekly: On climate angst and fake news (27 Jan)

·FX weekly: The Mnuchin bailout (20 Jan)

·FX weekly: FX weekly: Cause I'm a flip-flopper, yes I am (13 Jan)

·FX weekly: FX weekly: Treasury vs. Fed (06 Jan)

·FX weekly: Top 4 FX/MM trades for Q1-2019 (01 Jan)

·FX weekly: On liquidity, witches and warlocks (23 Dec)

·FX weekly: Qui N'avance pas, recule (16 Dec)

·FX weekly: Burnin down the house (9 Dec)

·FX weekly: In Gut we Trust (2 Dec)

·FX weekly: Pikachu ain't no hobbit (25 Nov)

·FX weekly: Powell pondering pausing (18 Nov)

·FX weekly: Another SOMA-test of 1.13 (11 Nov)

·FX weekly: 1.13 will hold unless the Republicans keep both chambers (04 Nov)

·FX weekly: HIA, SOMA and REBA-days (28 Oct)

·FX weekly: The debt ceiling is a USD ceiling (21 Oct)

·FX weekly: Volatility makes odd bedfellows (14 Oct)

·FX weekly: No Di-Maio'nnaise for your EURs (yet) (7 Oct)

·FX weekly: Along came year-end (30 Sep)

·FX weekly: Twin deficit scare #2 (23 Sep)

·FX weekly: The Pope of Nope has spoken! (16 Sep)

·FX weekly: Who wants to impeach a +60 ISM president? (09 Sep)

·FX weekly: It is time to go long Scandis again (02 Sep)

·FX weekly: The Conte-Trump alliance (26 Aug)

·FX weekly: Fat-burning shorts (19 Aug)

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
·FX weekly: Time to call in Steven Seagal(12 Aug)

·FX weekly: Is the cyclical momentum over-priced? (05 Aug)

·FX weekly: How to trade a cease-fire? (29 Jul)

·FX weekly: What's that curve? (22 Jul)

·FX weekly: The China Factor (15 Jul)

·FX weekly: Take a short trade war breather (08 Jul)

·FX weekly: Trump will never #238 (01 Jul)

·FX weekly: The USD is the best carry currency in the world (24 Jun)

·FX weekly: Dollar to provide headwinds for earning estimates (17 Jun)

·FX weekly: Fire and fury risks for the USD (10 Jun)

·FX weekly: It's not only Italy.. (03 Jun)

·FX weekly: The Sumo SOMA days (27 May)

·FX weekly: EM won't be sprinting, if the Fed is unprinting (20 May)

·FX weekly: The two final nails in the dovish FOMC-con (13 May)

·FX weekly: Is there anything left in the USD bull-run? (06 May)

·FX weekly: Dragon Energy (29 Apr)

·FX weekly: Relative curvature is the new king of FX (22 Apr)

·FX weekly: Why is EUR/USD not trading lower? (15 Apr)

·FX weekly: Like watching paint dry, they said (08 Apr)

·FX weekly: The list of potential USD-positives is getting longer (01 Apr)

·FX weekly: 2 reasons why EUR/USD has decoupled from rates spreads (25 Mar)

·FX weekly: Time to buy a USD lottery ticket? (18 Mar)

·FX weekly: Taxation mirror on the wall, who is the fairest of them all? (11 Mar)

·FX weekly: Trump's game of chicken (04 Mar)

·FX weekly: Will the market neglect the clutch of canaries? (25 Feb)

·FX weekly: Is the correlation break-down driven by FX hedges? (18 Feb)

·FX weekly: The liquidity tide is ebbing (11 Feb)

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
·FX weekly: Hawkish spectacles (04 Feb)

·FX weekly: Who will stop EUR/USD from moving higher? (28 Jan)

·FX weekly: Did the Democrats dent the Dollar? (21 Jan)

·FX weekly: Is 1.25 the new 1.20? (14 Jan)

·FX weekly: The euphoria rises (07 Jan)

·FX weekly: Paging Dr. Pangloss (01 Jan)

·FX weekly: The R-star of Bethlehem (24 Dec)

·FX weekly: A numbers game (17 Dec)

·FX weekly: The year-end liquidty shrink (10 Dec)

·FX weekly: Three reasons why EUR/USD isn't trading lower (03 Dec)

·FX weekly: Which currencies to sell if the housing downturn continues? (26 Nov)

·FX weekly: The global industrial cycle is set to weaken (19 Nov)

·FX weekly: Is high-yield a canary in the global coal mine? (12 Nov)

·FX weekly: Is this the end of the inflation convergence trade in EUR/USD? (5 Nov)

·FX weekly: Was that it for the EUR bulls? (29 Oct)

·FX weekly: Hawks in opposition, doves in charge (22 Oct)

· FX weekly:Continued convergence or re-divergence?(15 Oct)

·FX weekly: Thingsdon't matter until they do(08 Oct)

·FX weekly: "October seasonality is strong" (01 Oct)

·FX weekly: “Is 1.20 the new 1.15?”(24 Sep)

· FX weekly: Honey, I shrunk the balance sheet(17 Sep)

· FX weekly: “USD liquidity will turn scarcer, but when?” (10 Sep)

· FX weekly: “Strong currencies and inflation”(3 Sep)

· FX weekly: “USD in the (Jackson) hole” (27 Aug)

· FX weekly: “Q4 is the USD quarter”(20 Aug)

· FX weekly: “In the year 2525”(13 Aug)

· FX weekly: “EUR/USD ceiling or debt ceiling?”(6 Aug)

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere
· FX weekly:“Elevator up, stairs down “(30 Jul)

· FX weekly:Trump “spices” up EUR/USD(23 Jul)

· FX weekly:Flip-flop?(16 Jul)

· FX weekly:Consolidation time?(9 Jul)

· FX weekly:Hawks R Us(2 Jul)

· FX weekly:Another lowflation week?(25 Jun)

· FX weekly:No Fed put?(18 Jun)

· FX weekly:A bouncy dollar?(11 Jun)

· FX weekly:Heating up(4 Jun)

· FX weekly:Summertime sadness(28 May)

· FX weekly:Special counsel lessens Trumpbulence, while OPEC looms(21 May)

· FX weekly:Are China worries old hat?(14 May)

· FX weekly:Inflation week…(7 May)

Martin Enlund Joachim Bernhardsen Andreas Steno Larsen

Global Chief FX Strategist Analyst Global FX/FI Strategist
Martin.Enlund@nordea.com Joachim.Bernhardsen@nordea.com andreas.steno.larsen@nordea.com
4722487791 +45 55 46 72 29

e-markets.nordea.com/article/54114/fx-weekly-the-qe-train-to-nowhere