Date: 14 Dec 2017

In November, Sweden’s Skandinaviska Enskilda Bank (SEB) wrote an interesting research note titled “PPM Flows: An Upside EURSEK Factor in Mid-Dec.” But what are PPM Flows? In SEB’s words “the Swedish Pension Agency (previously called PPM) pays out pension capital annually to various mutual funds chosen by Sweden’s six million pension savers. A large share of their savings is invested in foreign assets. Consequently, such disbursements involve a negative SEK flow effect” and that a large chunk of those disbursements occur in December. In fact SEB estimates “that the annual pension disbursement from the Swedish Pension Agency (“PPM-flows”) amounts to SEK 39.2bn of which approximately 26bn is invested abroad” and expects “payment to take place on Dec 11th,” noting that EURSEK has in the past years been quite mixed the days before funds are distributed but has tended to continue higher the days after (on average for six days).” By SEB’s calculations while EURSEK “has on average been quite flat during the 20 days leading up to the PPM flows” in “four out of the past five years EURSEK has headed higher on the day of the PPM flow and continued to do so between 2 to 6 days.”

Of course if the market had been thinking along the same lines as SEB as regards the PPM-flows, traders might logically have been short of SEK ahead of Dec 11. A need to unwind existing short SEK positions might help explain why EURSEK fell so far so fast after Swedish inflation data on Dec 12 that surprised on the upside but where the above-forecast print arguably, as Dutch bank ING wrote, only offset the downside “misses in September and October.” But such a move doesn’t necessarily negate the logic of SEB’s disbursement-related argument.  The fact that EURSEK regained a firmer footing on Wednesday might even suggest that the underlying mid-Dec SEK weakness, that SEB wrote of, has re-asserted itself. Traders will make up their own minds on this. But one thing is for certain, the Swedish central bank, which meets again on Dec 20, will have the luxury of going into that meeting already knowing where the ECB stands. And on Dec 20 “SEB expects the Riksbank to announce an end to [quantitative easing],” that such a decision “would be a trigger for EURSEK to head lower,” and that “the seasonal pattern in January indicates that the likely fall in EURSEK at the end of the year will continue into the new year.” Time will tell.

Written by Neal Kimberley, External Currency Analyst.