Synopsis:

Bank of America (BofA) advises investors to consider fading the recent weakness of the Scandinavian currencies—Swedish Krona (SEK) and Norwegian Krone (NOK)—against the Euro (EUR), citing quantitative models and fundamental factors. Both SEK and NOK have shown significant depreciation against the EUR in Q1 2024, but BofA’s analysis suggests these movements may have gone too far, with a potential reversal on the horizon.

Key Points:

• Quantitative Analysis: BofA’s evaluation of EURSEK and EURNOK movements relative to rate differentials, moving averages, and fair values (as derived from dynamic factor models) suggests that both Scandinavian currencies are currently either oversold or undervalued versus the EUR.

• Fundamental Outlook: The bank expects both EURSEK and EURNOK to end the year lower than current levels. This outlook is predicated on the assumption of the Federal Reserve beginning to cut rates by December 2024 and a soft landing scenario in the U.S. economy.

• Supporting Factors for NOK and SEK:

  • NOK: Supported by stable oil prices, resilient economic growth within Norway, and relatively light positioning in the currency market.
  • SEK: Benefits from reduced risks of a hard economic landing in Sweden and the unwinding of previously established short positions against the SEK.

• Risks: While the overall outlook is favorable for the Scandinavian currencies, sticky U.S. inflation and unexpected moves by the Federal Reserve pose potential upside risks to the EUR/Scandies exchange rate forecasts.

Conclusion:

BofA’s analysis indicates a promising opportunity for investors to fade the recent weakness observed in the Scandinavian currencies against the Euro. Given the quantitative and fundamental factors highlighted, there appears to be potential for SEK and NOK to appreciate against the EUR as the year progresses. Investors should monitor key economic indicators and central bank actions, particularly from the Fed, as these will significantly influence the trajectory of these currencies.