Swedish krona’s deflation problem & AUDSEK prospects
City Index March 26, 2014 9:51 PM
<p>With much talk about AUD outperformance and CAD underperformance so far this year, time to focus on Sweden’s SEK, which is the only currency alongside […]</p>
With much talk about AUD outperformance and CAD underperformance so far this year, time to focus on Sweden’s SEK, which is the only currency alongside CAD to have fallen against USD so far this year out of the top 11-traded currencies.
SEK’s main problem is stubbornly low inflation, standing at -0.2% y/y. Within the group of top-11 traded currencies, Sweden’s negative inflation compares with Switzerland’s -0.1%. Sweden’s budget deficit of 1.5% of GDP and current account surplus at 5.5% of GDP pales in comparison to Switzerland’s budget and current account surplus balances of 0.5% and 10.1% of GDP.
SEK was dealt a fresh blow today after comments from Riksbank deputy governor Jochnick indicating inflation was “clearly too low” and about the importance to boost inflation to 2.0%. The comments were interpreted as a signal for an imminent rate cut at the April 9 meeting, which would be the first easing since November.
Sweden’s National Institute of Economic Research from its part is also pushing for further rate cuts, arguing that high household debt will not be impacted by a minor change in interest rates or house prices.
Higher real interest rates
Sweden’s deflation of 0.2% and repo rate of 0.75% means that the real repo rate stands at 0.95%, which compares to Norway’s -1.85. One factor. which may cause the Riksbank to pause next month is the stronger than expected release of Q4 GDP at 1.7% q/q from prior 0.5% against forecasts of 0.6%. But the Riksbank may well consider the priority of negative inflation and slash interest rates, which remain above most of the G7.
In the event of no rate cut, the Riksbank will likely issue a particularly dovish statement aimed at further weakening the krona.
Swedisk krona vs euro & Australian dollar
SEK’s fortunes appear to worsen into Q2, with USDSEK likely to regain its 200-week moving average near 6.66 and EURSEK slated to strengthen towards the 9.30. EURSEK is seen gaining due to policy factors but Volkswagen’s anticipated bid for Scania may be associated with renewed resistance facing EUR. A deal would likely by finalized by April 25.
Yet, if we anticipate further Aussie gains versus USD and EUR on the basis of dissipated jawboning from the RBA, then it makes sense to anticipate fresh gains in AUDSEK now that the pair is posting its first monthly gain in four months. The AUDSEK chart below shows each time the pair tested its 200-month moving average it went on to rebound towards its 100-month MA and beyond. A 3.0% advance towards 6.15, followed by 6.40 would be in order for this summer, especially of the RBA-Riksbank yield advantage remained at least intact, or widened.