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In Sweden, the prospects of a policy pivot were delayed not derailed this year.
At the October meeting, the central bank signaled that it was waiting for further information which could motivate a QE extension, and also extended its mandate to facilitate quick FX intervention. In contrast, the ECB started to reduce the size of its asset purchases.
On the rates side, however, the first Riksbank hike from current negative rates at -0.50% is signaled to occur not before mid-2018.
This contrasts with the more dovish rates guidance of the ECB, which still states that the key rate will remain at its level “well past the horizon of the net asset purchases”. The Riksbank project the Sweden CPIF at 1.8% in 2018 and upgraded its GDP forecast to 2.9%, putting it on a steeper path.
The relative normalizations of the ‘traditional’ side of ECB and Riksbank monetary policies (repo rate) should in any event ultimately put the EURSEK under pressure.
EURSEK is currently overshooting cyclical by over 4% the most since 2010. The rebound in inflation to 2.0% in November reduces the risk of the central bank extending QE again next week (this was 0.3% ppt higher than the Riksbank's estimate), although it could still push back the lift-off point for rates by a quarter to 3Q’18 in order to better align itself with the ECB’s extension of QE through September.
Of the latter, sharp SEK strength after a strong CPI print is a reasonable template for what might be expected of similar surprises in other currencies next year and is a potential source of thematic alpha for vol investors willing to do the hard yards of event trading with short-dated options.
Long a 6m 9.60 EUR put/SEK call. Paid 57.2bp November 21. Revalued at 52bp. Courtesy: SG
