The value of the SEK jumped this morning on what was deemed to be a more hawkish than expected bias from the Riksbank, notes Jane Foley, Senior FX Strategist at Rabobank.
Key Quotes
“As widely expected, interest rates were left unchanged at the central bank’s regular policy meeting. However, counter to the predictions of many market commentators, the Riksbank maintained the guidance that “slow repo rate rises will be initiated towards the end of the year”.”
“Despite a strong labour market, underlying inflationary pressures remain moderate.”
“The need to manage the level of household debt provides a strong reason for the Riksbank to start normalising interest rates.”
“Over the past year the SEK has been soft. In May the SEK hit its weakest levels since 2009 vs. the EUR and its recovery since then has been half-hearted. The weakness of the SEK may provide the Riksbank with an opening to hike rates later this year. However, policy makers are likely to proceed with caution.”
“The fact that the ECB has signalled that rates are set to remain on hold until at least the middle of next year, suggests that the Riksbank will be eyeing the ECB carefully to avoid creating a strong recovery in the SEK vs. the EUR.”
“On a 12 mth view, the SEK is the second weakest performing G10 currency after the NZD. In this period Swedish underlying CPI inflation has traded a 1.7% y/y to 2.3% y/y range. Although this is still moderate, it is relatively firm compared with core Eurozone CPI.”
“Although on some measures the weakness of the SEK over the past year or so suggests that it has become undervalued vs. the EUR, not all models concur. The OECD’s purchasing power parity estimate still indicates that the SEK is significantly overvalued vs. the EUR and this will give Riksbank policy makers pause for thought.”
“There is a possibility that the BoE and the Norges Bank will hike rates this year and, by confirming the risk of a move by year end, the Riksbank has firmly positioned themselves as one of the G10 hawks. We see scope for EUR/SEK to move back to the 10.00 area by year end.”
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