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Over the past week the Swedish krona came under considerable pressure, but in the end, it did not achieve a sustainable break of the 10 mark in EURSEK, not least as Riksbank deputy governor Kerstin af Jochnik came to the rescue of the ailing currency yesterday.
According to af Jochnik, the current SEK weakness was only temporary and her outlook still entailed a stronger krona. That may sound comforting at first but one has to wonder why krona depreciated that heavily in the first place over the past few days.
Of course, the trigger for the move was clearly the EUR strength following the strong German GDP data last week. But in my view, the true reason for the pronounced SEK weakness is likely to be the recently disappointing Swedish inflation data. Over the past year, the krona had held up surprisingly well as inflation in Sweden had developed positively.
In July the inflation measure preferred by Riksbank reached 2.4% and was therefore even well above the central bank’s target. That, in turn, had fueled hopes of an imminent normalization of monetary policy on the part of Riksbank.
However, this positive inflation trend has come to a standstill over the past months, destroying exactly this hope.
Very recently, Bloomberg stated that from Morgan Stanley to Bank of America Corp. there’s a growing chorus of economists siding with Federal Reserve Chair Janet Yellen’s “best guess” that price pressures will soon gain momentum, paving the way for the Fed and other key central banks to continue unwinding ultra-loose monetary policy in a gradual fashion.
Moreover, without the prospect of imminent rate hikes, SEK is actually quite unattractive due to the low-interest-rate levels. The key rate stands at -0.50%. Due to the rise in inflation last year that means that real interest rates are now clearly in negative territory. It is now up to the central bank, or inflation, to reverse the trend in krona again.
Of note are G10 CPI prints seem to be still under pressure. Yellen recently mentioned that the low inflation is a mystery, it’s not just the case with the US but so is with Sweden. The Riksbank minutes released this week indicated that it is keeping all options open regarding the QE decision ahead of the December meeting.
Given the binary outcome of the inflation reading next week, we remain on the sidelines regarding SEK for now, but it is worth noting that not only is SEK modestly weaker than Riksbank forecasts, but it is also 2.5% cheap vs. EUR.
