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Jane Foley, Senior FX Strategist at Rabobank, suggests that on the heels of softer than expected labour and retail sales last week, the market was not prepared for this morning’s release of much stronger than expected Swedish Q2 GDP.

Key Quotes

“At 0.5% q/q, the pace of growth in the quarter was twice the size of the market median.   The year-on-year rate recorded another 3.3% headline figure in line with the number recorded the previous quarter.”

“The data reinforce the risk that the Riksbank will stick to its guidance and hike interest rates before the end of the year, which would be well ahead of the first ECB move of the cycle.   We maintain our view that the SEK will outperform the EUR in the coming months and look for a move towards EUR/SEK10.00 on a 6 month view.”

“Overall, the economy has managed to sustain consecutive quarters of growth since H2 2013 fuelled by high levels of employment and very cheap borrowing costs.”

“Although there is a broad consensus that the pace of rate hikes will moderate once the Riksbank starts the process of tightening, there is still some disagreement about when the first rate hike will be. This morning’s GDP inspired rally in the SEK demonstrates the degree of scepticism there was in the market regarding the Riksbank’s guidance that rates will be raised this year.”

“Today’s data support the policy hawks, though many market commentators have been favouring steady rates at least until December.”

“Measured from the middle of 2016, the value of the SEK has dropped more than 10% vs. the EUR. On some measures of purchasing power parity, the SEK is undervalued vs. various other G10 currencies, though this conclusion is not universal.   On the OECD’s PPP measure the SEK is still around 18% overvalued vs the EUR, though the relatively firmer rate of inflation in Sweden would argue with this conclusion.”

“Headline Swedish June CPI inflation registered 2.1% y/y with the core measure at 2.2% y/y.   PPI inflation registered 8.0% y/y in June and concerns are growing about a surge in domestic electricity prices due to the impact of dry weather on water levels in dams used for power generation.”

“Since interest rates are set to move in favour of the SEK in the coming months, we see scope for SEK outperformance.   Our 12 mth EUR/SEK forecast stands at 9.8.”