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The fall in price levels by -0.2% in September shock up Riksbank: over the past few months the inflation trend has slowed – and that despite a notable depreciation of the krona since the summer.
Riksbank already reacted at its October meeting and not only postponed the timing for the first rate hike (to early 2018) but also signalled that the threshold for further monetary policy easing is low.
Riksbank pointed out explicitly that it may well extend its bond purchasing programme ahead of the next meeting on 21st December.
At the moment the programme comes to an end at the end of the year. Even if this is mainly aimed at possible monetary policy measures on the part of the ECB, October inflation data due for publication today will play an important role.
Further disappointment is likely to cause the market to hope for aggressive monetary easing steps and may put a temporary end to SEK appreciation seen since the US Presidential election.
As a result of above fundamental factors including Fed hike bets in December, EURSEK is spiked to the highs of 9.9192 over the past month, albeit once again the cross briefly flirted with the upper end of the six year range at 9.60-9.9192. As we expect continued range-trading through until year-end and then only very modest appreciation from SEK through next year is upheld (9.35 by end-16 and 9.15 by Q3’17).
The catalyst for a major break higher in SEK is lacking – a definitive end to the Riksbank easing cycle and a tangible prospect. In the case of SEK, long positions in USD vols can be advantageously coupled with short vols in the EUR cross.
Financials woe doesn’t question, should play its part in keeping USD correlations at historically firm levels, especially when removing the BoJ-led effect of JPY. It is, therefore, supportive of a USDSEK vs EURSEK vol spread trade.
