On Thursday, the Swedish Riksbank will once again leave its main policy rate unchanged at 1.0%. On the one hand, the country’s economic outlook has improved slightly since its last meeting in July according to various leading indicators including manufacturing and consumer confidence. On the other, inflation remains well short of the Riksbank target while improved sentiment has not yet been reflected in stronger growth (see also our latest edition of Nordic Outlook published last week for a detailed analysis of why Swedish inflation will continue to undershoot the CPI target at 2%). Indeed, we expect the central bank to trim its economic forecasts for 2013/2014 and to keep open the possibility (albeit small) of lowering interest rates including its rate path if necessary. Although the market is reasonable in not discounting the likelihood of a potential rate cut, the curve has steepened a little too aggressively, signalling an initial hike next spring or summer. Also, the trade weighted SEK remains relatively firm (KIX) with emerging market currencies being sold off. Currently, it trades largely in line with Riksbank expectations, implyingthat the SEK is not a major consideration in determining monetary policy. Potentially, the surprise factor is the labour market outlook: employment growth remains surprisingly resilient with the bank’s unemployment forecast set to be lowered (more in the latest FII). Next week we publish our Currency Strategy. Our expectations for the SEK are unlikely to change much, with the currency torn between present weak growth and low inflation, which signal a dovish monetary policy, at least for now. Further, previous positive portfolio flows may reverse as investors target higher yielding instruments elsewhere in Europe, threatening the SEK. However, as 2014 approaches we switch from a neutral position in favour of a more constructive approach based on improving global growth and the Riksbank eventually hiking its policy rate well ahead of the ECB. Consequently, EUR/SEK remains a sell on rallies and we remain long SEK through a short CHF/SEK recommendation.
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