Swedish economy surpasses expectations: Swedish growth and underlying inflation have continued to develop strongly, rising to the highest levels in over four years and beating expectations of…
both its own central bank (Sveriges Riksbank or the “Riksbank”), and the market consensus (see Figure 1). Yet, the EUR/SEK currency pair has risen almost 1.8%* in the past month (SEK weakening), as accommodative monetary measures aimed at limiting Krona strength have been successful. However, at the last two monetary policy meetings, there have been increasing signs that members of the Riksbank’s Executive Board view further monetary easing as unnecessary, especially given the strong outperformance of the Swedish economy and the improving financial environment. We expect that data due in the next three weeks1 will reaffirm these views and cause markets to price in lower expectations of intervention. Upward momentum for EUR/SEK is likely to fade and potentially reverse recent gains.
Board members voice differing views: The Riksbank cut its benchmark interest rate to -0.5% in February and expanded its asset purchase programme by SEK45bn (US$4.8bn) at its April meeting. The measures were taken to ensure weakness of the Krona and reinforce its important contribution in helping lift inflation. At the last two meetings, Executive Board members have dissented when voting for additional monetary measures, or expressed a more conservative view as to the appropriate course of action. In the absence of a significant catalyst, further monetary measures to weaken the SEK are likely to be met with resistance, especially if upcoming growth and inflation data (due on the 30th May and 14th June respectively) surprise to the upside.
Resistance ahead: The EUR/SEK is moving towards the higher end of its recent 9.15-9.5 range. Should the pair approach its 2016 high of 9.5046*, then we see this as an excellent point which to establish tactical short exposure (see Figure 2). Strong data should ensure Riksbank inaction at its July meeting and allow the market to begin to re-price the outperformance of the Swedish economy relative to its mainland European peers. Sweden’s GDP growth for Q4 15 was 4.5%*, almost three times that of the Euro Area over the same period.
*All figures quoted are sourced from Bloomberg unless stated otherwise. 1Q2 2016 GDP growth and inflation numbers.