M IdeaG10 FX Strategy | EuropeNOK, Stokk and Barrel Morgan Stanley & Co. International plc+David S. Adams, CFAStrategist David.S.Adams@morganstanley.com +44 20 7425-3518 Dominic J KrummenacherStrategist Dominic.Krummenacher@morganstanley.com +44 20 7425-9781 Wanting LowStrategist Wanting.Low@morganstanley.com +44 20 7425-6841 Morgan Stanley & Co. LLCAndrew M WatrousStrategist Andrew.Watrous@morganstanley.com +1 212 761-5287 Zoe K StraussStrategist Zoe.Strauss@morganstanley.com +1 212 761-0407 We recommend long NOK/SEK. Norges Bank is slowing its NOK sales dramatically as the Riksbank's SEK-buying FX-hedging programme is about to end, while Swedish data are underperforming peers meaningfully. Expected rate differentials imply NOK/SEK rising to 1.06.Central bank footprints are shrinking rapidly: Both the Riksbank and Norges Bank have been active in FX markets, though for different reasons and in different directions – the Riksbank buying SEK and Norges Bank selling NOK. Both flows are set to slow meaningfully, removing a significant NOK/SEK headwind.Slowing Riksbank SEK purchases... We estimate that on-market transactions from the Riksbank's FX-hedging programme, where it buys SEK versus USD and EUR, should end in the next week or two. The recent rally in SEK has reduced the chances that the Riksbank will extend the hedging programme at its February 1 meeting....meet slowing Norges Bank NOK sales: Meanwhile, Norges Bank has slowed its daily average pace of NOK sales from NOK 1,400 million/day to NOK 350 million. This is twice as fast a decline as we were expecting and we think that the much slower pace of sales will continue.Policy and rate divergence in Scandinavia: The absence of central bank flows suggests that NOK/SEK can trade more on fundamentals – which point to a higher NOK versus SEK. Norwegian data have held up while Swedish data have disappointed the most in the G10. We estimate that Norges Bank-Riksbank policy divergence implies NOK/SEK at 1.06, compared to sub-parity today.NOK/SEK is uncorrelated to risk: NOK/SEK's correlation to risk assets has fallen to roughly zero. Continued lack of correlation suggests that macro factors like global risk demand won't impact the pair much, rendering it a better reflection of the local stories suggesting NOK/SEK topside.Please click here if you would like to be added to my distribution listMorgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates...
