Swedish Krona: Moderately firmer tone into year-end – Rabobank

Rabobank’s Senior FX Strategist Jane Foley notes that benign Consumer Price Index (CPI) and CPIF inflation leave Sweden and the Riksbank better positioned than many G10 peers to delay rate hikes despite supply disruptions from the Iran war. However, with Value Added Tax (VAT) effects fading and growth data improving, markets now price Riksbank tightening and Foley expects EUR/SEK range trading with a moderately firmer Swedish Krona into year-end.

Riksbank risks and SEK outlook

"For many G10 central banks, supply disruption resulting from the Iran war has either brought forward rate hikes or increased the risk of policy tightening this year. Against the backdrop of benign CPI inflation in Sweden, however, the Riksbank has so far been better positioned than most of its peers to side-step a policy move."

"As the impact of the VAT cut on food prices falls away next year, pressure on the Riksbank to hike rates can be expected to build. Indeed, the market is already positioned for 30 bps of rate hikes on a 6-month view."

"These outcomes likely encouraged the IMF to conclude in its July staff report on Sweden that the country’s “cyclical economic recovery is ongoing on the back of policy support and a rebound in real incomes”."

"Indeed, its policy guidance last month stated that “the probability of the rate being raised later this year has increased compared to the assessment in March”. This outlook largely supports the market’s assessment regarding rate hike risks."

"While we see scope for range trading in EUR/SEK near term, for choice, we expect a moderately firmer tone to emerge in the SEK into the end of the year."