There were both valuation and policy considerations for selling NZD against SEK. While the valuation proposition has been corrected as the cross has collapsed by 16%, the policy dimension remains intact, and albeit now better appreciated as the RBNZ has gotten into its rate-cutting stride.



We are not overly concerned that the NZ curve already discounts 50 bps in additional tightening from the RBNZ - the curve has persistently led central bank rates lower and the data continues to encourage rather than to challenge the view that the RBNZ has embarked on an easing cycle that could extend to 100 bps or so.



In Sweden the rebound in CPI to 0.1 ppt above the Riksbank's trajectory has swung policy expectations against the Riksbank delivering on its bias to cut rates in September. We wouldn't bet against a further round of easing, but the pre-requisite for that would be either a renewed drop in inflation (there are 3-1/2 weeks until the next CPI release) or a more pronounced overshoot in SEK (the currency is currently 3.25% above the Riksbank's forecast).



One technical factor that could help sustain the downtrend in NZD over and beyond a further repricing of monetary policy is a potential turning of the foreign bond investor tide. Non-residents increased their holdings of NZ government debt by NZD 29bn between 2011 and 2014, equivalent to 50% of GDP, an inflow which explained part of NZD's substantial cyclical overvaluation.



Chances are that foreign investors will look to reduce their exposure as NZ yield spreads compress, and we see little reason to suppose that such a bond outflow would not have a symmetrical effect in depressing the currency over and beyond that suggested by the deterioration in policy rate spreads.