- Swedish inflation came in vastly below the target in the past month pushing the SEK substantially lower
- Fading price dynamics could stem from a waning impact of temporary factors
- Further depreciation of the Swedish krone seems to be unlikely given the bond market
The Swedish krona has found itself among the worst performing currencies in the G10 space in the aftermath of the disappointing inflation report showing that price pressures had subsided substantially in the past month. Moreover, taking into account wage growth one may assume that the latest spike in inflation has been predominantly sparked by temporary factors. Even as the SEK is sapping against the greenback much more severe depreciation appears to be unlikely given the bond market.
Sweden’s CPI slowed down in October from 2.1% yoy to just 1.7% yoy while CPIF (the official target for the Riksbank) decreased even more from 2.3% yoy to 1.8% yoy. The market expectations had pointed to 1.8% yoy and 2% yoy respectively. Even as price pressures seem to be fading away, it hasn’t been unexpected though. Let’s remind the latest minutes of the Riksbank where we could find that the Swedish central bank was certain that a part of the recent inflation pick-up had been caused by temporary factors and therefore inflation was anticipated to fall back somewhat in the coming months. Keep in mind that this and oncoming data might be conclusive as far as the bond buying program is concerned as the Riksbank will decide on this topic at its last meeting this year in December. Taking into consideration that the European Central Bank has already taken its first step aimed at leaving loose monetary policy, one may forecast that the Swedish policymakers could follow this decision, hence the consensus seems to suggest no extension.
While CPIF soared over the course of the past months, partially on the back of a base effect, wage growth remained much more muffled suggesting that wage inflation isn’t around the corner. Having said that, while a base effect caused inflation surging (helped by others temporary factors), the same effect is anticipated to deduct a bit from price growth in the coming months. Thus once wage growth accelerates, it should begin convincing policymakers to change their mind when it comes to a rate increase. Bear in mind that the Riksbank expects the first rate hike will occur in mid-2018, however economists and traders beg to differ anticipating the first move in rates closer to the end of the next year. Finally let’s underline that accomodative policy (both fiscal and monetary) in the country has led to solid 3% GDP growth in the second quarter while employment growth remains quite satisfactory and the jobless rate keeps moving down. Hence, in order to reap full effects of expansionary policy we should see a pick-up in wage growth which in turn could translate into higher household spending boosting GDP growth.
While the EURSEK is surging significantly which reflects an impact of the stronger single currency to some extent, the USDSEK is rising much less (ca. 0.5% at the time of writing). The latter seems to be en route to a crucial resistance area at 8.67 which is underpinned by a 23.6% retracement. Notice that the pair is still relatively high given the long-term valuation which coincides with the long-term overvaluation of the US dollar. To sum up, the bond market does not support the much weaker SEK as well as it points to fair valuation in the USDSEK and undervaluation of the Swedish currency against the euro which we pointed out last month.