Released on Wednesday, Sweden’s economic tendency indicator dropped to 110.7 in August from 112.3 in July but, as France’s Credit Agricole had written ahead of the data release, the market was “looking for a slight cooling in business confidence in August.” It is Credit Agricole’s view that “it will take a sizeable data disappointment to undermine the resilient SEK” and that Sweden’s “strong real economy and improving inflation outlook should continue to make markets bet on the gradual removal of monetary stimulus in Sweden.” The question for traders is whether any such policy developments or hints at such moves will be unveiled at the next policy meeting of Sweden’s central bank, the Riksbank, on September 7.
Dutch bank ING notes that “10-year Swedish:Bund spreads have been widening sharply since Sweden’s August core inflation came in at 2.4 per cent year-on-year.” In ING’s view “it seems like the bond market vigilantes have ridden into town and politely told the Riksbank that their continued policy of quantitative easing and a policy rate of minus 0.5 per cent is no longer credible when the economy is growing at close to 3 per cent and when both inflation and long term inflation expectations are above target.” The quandary for the Riksbank is that if it begins normalizing policy ahead of a move by the European Central Bank to taper asset purchases, it risks a surge in the value of the Swedish krone against the euro (EURSEK). But on the flipside of that the Riksbank also has to think about its own monetary policy credibility given the economic numbers coming out of Sweden and the bond market’s response to those figures. ING suspects the currency market will position itself ahead of September 7 for the on the basis that the Riksbank might follow the Bank of Canada’s example and suddenly turns hawkish.
Written by Neal Kimberley, External Currency Analyst.