13 Aug 2015
(Too) Early signs of rising Swedish inflation - UBS
FXStreet (Córdoba) - Swedish inflation data surprised positively on Thursday, thereby strengthening the SEK significantly. The UBS analyst team notes that even though this is good news for the Swedish Riksbank and its quantitative easing program (QE), numerous risks remain that should prevent an early retreat from easy monetary policy.
Key Quotes
“Notably, underlying inflation, excluding energy prices, rose to a five-year high at 1.5%. While this is good news for the Swedish Riksbank and its quantitative easing program (QE), numerous risks remain that should prevent an early retreat from easy monetary policy. As the US Federal Reserve approaches its first rate hike in almost a decade, higher-yielding currencies should still perform better than the SEK”.
“Swedish inflation expectations remain low and do not reveal much impact from QE. Furthermore, the Chinese currency devaluation should mute Swedish import prices, whose growth rate remains sluggish”.
“Last but not least, the Riksbank will likely be wary of reducing its easing bias before the major Swedish wage negotiations take place around the turn of the year”.
“Markets seem to have positioned themselves for another rate cut. Swedish two-year bond yields have fallen into deeply negative territory, not far off from Swiss ones. As such, we see little room left for EURSEK to rise. The pairing should continue trading in a 9.10 to 9.60 range.
“There is a high chance of another rate cut and an extension of the QE program at the next Riksbank monetary policy meeting on 3 September. No action would likely pull EURSEK down toward 9.20. Over a six to 12-month time horizon, it should fall closer to 9.00, as Swedish inflation trends will likely continue improving as inflation expectations recover”.
Key Quotes
“Notably, underlying inflation, excluding energy prices, rose to a five-year high at 1.5%. While this is good news for the Swedish Riksbank and its quantitative easing program (QE), numerous risks remain that should prevent an early retreat from easy monetary policy. As the US Federal Reserve approaches its first rate hike in almost a decade, higher-yielding currencies should still perform better than the SEK”.
“Swedish inflation expectations remain low and do not reveal much impact from QE. Furthermore, the Chinese currency devaluation should mute Swedish import prices, whose growth rate remains sluggish”.
“Last but not least, the Riksbank will likely be wary of reducing its easing bias before the major Swedish wage negotiations take place around the turn of the year”.
“Markets seem to have positioned themselves for another rate cut. Swedish two-year bond yields have fallen into deeply negative territory, not far off from Swiss ones. As such, we see little room left for EURSEK to rise. The pairing should continue trading in a 9.10 to 9.60 range.
“There is a high chance of another rate cut and an extension of the QE program at the next Riksbank monetary policy meeting on 3 September. No action would likely pull EURSEK down toward 9.20. Over a six to 12-month time horizon, it should fall closer to 9.00, as Swedish inflation trends will likely continue improving as inflation expectations recover”.