SEK: Upside risks? - Rabobank
Jane Foley, Senior FX Strategist at Rabobank notes that EUR/SEK has retraced all of the gains made on Friday on the news that the 12 year term of Riksbank Governor Ingves will be extended by another 5 years.
Key Quotes
“The short-lived sell off in the SEK to this news last week was a reaction to Ingves’ reputation as a policy dove. Not only was he at the helm of the central bank as pushed the repo rate into negative territory in 2015 but he is clearly reluctant to hike interest rates for fear of boosting the value of the SEK vs. the EUR and hindering the potential for exporters.”
“Earlier this week the release of Sweden’s manufacturing PMI for September recorded a stunningly strong 63.7, well above market expectations. This has been followed this morning with an even better 63.8 outcome for the services sector PMI. The combination of these numbers suggest that growth in the third quarter has been strong. That said there was a weakening in activity data during the spring months which is consistent with the downward revision to Q2 GDP growth announced earlier this month.”
“Q2 GDP growth was initially announced at an extremely buoyant 1.7% q/q and then unexpectedly revised down to a more moderate 1.3%. That said, this still represents a strong pace of expansion as the economy continues to benefit from cheap money and from a strengthening pace of activity in its Eurozone neighbours. While the strength of domestic economic growth implies that the Riksbank could be considering a reduction of monetary stimulus, Ingves continues to push back against this view. On Tuesday, the Governor reiterated that it was too early to discuss changing the current policy and that it was important that the value of the SEK does not rise too quickly. This view has been given broad-based support by last week’s publication by the IMF which concluded that “an unwinding of the accommodative stance of monetary policy must continue to await a durable rise in inflation”.
“Wage inflation has been soft across most of the G10 in recent years and Sweden is no exception. The IMF refers to low wage rises “of only 2.3% in 2015-16” contributing to subdued core price pressures. In its September policy statement the Riksbank states that “monetary policy needs to be expansionary to safeguard the role of the inflation target as nominal anchor for price-setting and wage formation”. The Bank forecasts that the repo rate is unlikely to be raised from its current level of -0.5% until mid-2018 and that purchases of government bonds will continue during the second half of 2017. That said, the Riksbank also stated that “inflation has continued to rise and in recent months been higher than expected. The outcomes are partly explained by temporary factors, but even disregarding this, inflation has been stronger than expected”. The August CPI inflation release produced a rise of 2.1% y/y for the headline number, slightly below the outcome for July. That said, Sweden’s TNS SIFO inflation expectations survey for September showed an upward creep.”
“For some time the market has been debating the relative buoyancy of the Swedish economy would lead to a change in tact by the central bank. So far market the Riksbank appears to be in no hurry to change rates. The Riksbank appear content to take its cue from the ECB so to reduce the likelihood of a significant appreciation in the value of the SEK vs. the EUR. Some additional support from the Riksbank’s dovish position can be garnered from the reports that Sweden’s FSA will not rule out a loan to income cap in the future. Further macro-prudential measures should relieve some of the Riksbank’s concern over the impact of its accommodative policy settings on creating Sweden’s high household debt levels.”
“Although the Riksbank continues to talk a dovish line, the strength of the domestic economy will continue to support market expectations that policy accommodation will have to be reduced in the coming months. We favour selling rallies in EUR/SEK and expect a move towards EUR/SEK9.40 on a 6 mth view.”