Swedish Krona Forecast: Riksbank Rate Decision Ahead

SEK TALKING POINTS – RIKSBANK RATE DECISION

• Riksbank prepares to announce rate decision with commentary

• Expect trading to be thin leading up to the major event risk

• Can the central bank afford to raise rates given the outlook？

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All eyes will be on the Riksbank later today as the central bank prepares to announce its rate decision followed by commentary. Overnight index swaps are showing a six percent probability of a hike, with the remaining 94 percent expecting the central bank to hold rates at -0.25 percent. The fundamental outlook both in Sweden and Europe suggests an inhospitable environment for tightened credit conditions.

Recent inflation data has been trending below the policy target rate of two percent, lending credence to the notion that a hike may not be the outcome of this particular meeting. This is compounded by recent unemployment data that showed the number of those without a job jumped from 6.6 percent to 7.7 percent. The Swedish Krona plunged alongside local bond yields, hinting that the downbeat report inspired a dovish shift in policy.

The central bank has stated that it intends on raising rates in Autumn – more specifically in September. However, one needn‘t look further than the benchmark OMX’s performance contrasted with Swedens economic activity to see that investors are not pricing in a hike any time soon. The almost-20 percent rise in the index – ignoring the economic circumstances – suggests traders are expecting a continuation of the loose credit paradigm.

Accommodative monetary policy also creates debt risks associated with rising household indebtedness being one of the top concerns of Riksbank officials. Waning external demand from Europe – a key destination for Swedish goods– and overall slowing global growth continues to weigh on the export-driven economy and Krona.

The grim outlook for Europe was further reinforced after German IFO sentiment indicators came in below expectations. Riksbank Deputy Governor Martin Floden has expressed concern about slower growth in the regional powerhouse because of the implications it has not only on the Swedish economy but on regional growth as well. This comes as the threat of an EU-US trade war continues to cast a shadow over the Continent.

These headwinds may prove difficult for the Riksbank to maintain its current intention of exiting negative rate territory by year-end, especially with rising unemployment at home cooling inflationary pressure. Year-to-date, it is ranked as the worst performing currency out of the G10 league, while its Norwegian counterpart is the second-best performing currency – thanks in large part to a strong recovery in crude oil prices.

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