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At its meeting last week Riksbank maintained its rate outlook that projects cautious rate hikes from the second half onwards, despite the fact that it slightly lowered its inflation outlook for this year at the same time.
Over the first 6 months of the year, inflation is likely to remain slightly below the 2% target, which is mainly due to base effects though, rather than a principally weaker inflation trend. Riksbank nonetheless remains very cautious as far as inflation is concerned so that the publication of inflation data remains an event risk for krona.
The January data has been out yesterday. Consumer prices in Sweden declined 0.8 percent month-over-month in January of 2018, after a 0.4 percent rise in December and compared to market expectations of a 0.7 percent fall. Yet, the CPI normally drops in January due to a seasonal decrease in clothing and footwear prices.
Don’t let the -0.7% mom expected make you feel nervous. On a seasonally adjusted basis, this corresponds to approx. +0.1%. And that would be sufficient for Riksbank, and the krona, for now.
Options trade strategy:
As a cyclical play SEK has lost its way rather as risk markets have corrected and as house prices have continued to fall (the 2.4% oya decline is the worst in six years). Our option position has three months left to run and so we still have some time for this to come back on side. Yesterday has been the make or break for the trade with the combination of the Riksbank meeting and CPI data.
On balance the Riksbank is unlikely to make any major changes to its earlier communications going forward, aside from perhaps flagging recent market volatility as a risk factor to monitor, and it is not certain whether continued signalling of a July hike will be sufficient by itself to turn the tide for SEK, cheap valuations notwithstanding, as a result, the underlying spot FX of EURSEK likely to spike until then.
Accordingly, we advocate long in 9.70 EUR put/SEK call of 3m tenor. Paid 57.2bp, revalued at 33bp.
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