Volatility eases, dollar is weak, ruble recovers (Daily analysis 27.04.2021)

The currency market is sleepy, and the dollar is weak. The bad epidemic situation in South Asia or Joe Biden's new tax plans are for the markets like a harmless hiccup only temporarily dampening the appetite for risk.

Wall Street is starting the week with new records; copper is approaching all-time highs. Important agricultural commodities such as soybeans, coffee, wheat and corn are also the most expensive in years. The EUR/USD pair approached 1.21, and the GBP/USD moved to 1.39.

The Swedish krona exchange rate drops the burden of negative rate risk

In Q1, the Swedish krona was among the weakest of the main currencies, e.g. it lost around 2% against the euro. This needs to be viewed in the context that the currency led the way and rose against the zloty by as much as 12% in the previous year. However, it turned out that much less draconian restrictions than in most other countries were not enough to cope with the third wave of disease. The advantage of the strong economic situation has been lost. The growth path has fallen short of optimistic expectations, which after the rally in previous quarters required adjustment. Monetary policy also played its part in the weakness of the krona. The Riksbank authorities softened their stance in February. Not only do they not expect a rate hike until the end of 2024, but they are willing to consider further cuts in case of persistent pandemic problems.

However, such an attitude may soon be abandoned given the red-hot property market, industry (global trend) and stable inflation expectations. The discussion of limiting the pace of asset purchases may also be influenced by the very strong impact of the program on the functioning of the local debt market. For now, given the high number of new COVID-19 cases and hospitalizations, the bank remains cautious but clearly sees rate cuts as a last resort. The characteristics of the Swedish krona, a currency strongly linked to the global economic situation and risk appetite, makes it predisposed to staying close to last year's maximum strength against the euro. At the same time, due to the lack of prospects for raising the cost of money, it should be weaker than the Norwegian krone. The zloty has definitely more room to strengthen than the Scandinavian currencies.

Ruble exchange rate rebounds strongly

The black clouds swirling over the ruble for weeks have suddenly cleared. First, Alexei Navalny, who is in a serious condition, ended his hunger strike that lasted almost a month. The West had announced harsh sanctions in case of the oppositionist's death - now they are becoming less real. Secondly, Russian troops were withdrawn from the Ukrainian border area, and their grouping in the area was officially assigned to exercises and manoeuvres. As a result, geopolitical tensions have visibly decreased, which has opened the way for a surge in the strengthening of the Russian currency. The Bank of Russia also played an important role in the recovery. The monetary authorities decided to sharply increase the cost of money (from 4.5% to 5.0%). At the same time, inflation forecasts were raised to about 5% by the end of the year. This means that the monetary authorities did not hesitate to tighten the policy course in advance and will react sharply to any signs of price pressures getting out of control. The ruble gained around 3% erased much of the discount that began in March and is practically the most expensive in three weeks. The USD/RUB exchange rate has retreated from around 78.00 to 75.00. One can assume that the fundamental value of the Russian currency is higher than current levels, but a significant geopolitical risk premium will also persist.