SEK outlook : RBC

RBC Capital Markets notes:

1-3 Month Outlook - CPI uptrend looks shaky

Expectations that Sweden was on the road of recovery from low inflation took a slight knock when the latest April reading of CPI showed headline prices falling 0.2% y/y. Underlying CPI was similarly soft, coming in at 0.7% y/y, down two-tenths from the prior reading of 0.9%y/y. 

The trend acceleration in underlying inflation that began last year is intact, but only just and the Riksbank may well feel pressured to ease policy again. Indeed, Riksbank Deputy Governor Jansson expressed his dissatisfaction when he said that 'We (Riksbank) are not happy with this development for inflation' and that the Riksbank has 'high preparedness to do more'.

A gradual strengthening of SEK has also been piling pressure on the Riksbank. After an initial spike in March when the central bank aggressively eased policy, EUR/SEK has fallen close to the 9.10-9.20 range that triggered that response. 

A strengthening SEK poses a threat to the nascent inflation recovery and there has been plenty of jawboning by the Riksbank to keep SEK under pressure. Riksbank Deputy Governor Jansson remarked that 'the Krona is extra important right now' while Deputy Governor Floden noted that 'a weaker SEK in the short term is good'.

With the recovery in CPI looking shaky and the hanging threat of more action by the Riksbank, we see SEK appreciation capped and expect EUR/SEK to remain range bound between 9.30 - 9.40 for now.

6-12 Month Outlook -2016 wage bargaining in focus

The Riksbank will want to see CPI close to the 2% inflation target by 2016. That is when the next major large-scale wage bargaining rounds take place where agreements covering around 3 million employees in the private and public sector will expire. 

With headline inflation still mired ~0.0% and almost half of 2016 covered, time is running out for the Riksbank. Less than 50% of the main CPI subgroups are registering price increases so the lack of breadth will be a concern. The Riksbank will want to support any nascent recovery in CPI by keeping downward pressure on SEK. 

Assuming core inflation continues its trend acceleration higher (which looks shaky at the moment), we see EUR/SEK drifting lower in the latter half of the year once higher prices become more entrenched and the threat of more monetary easing reduces.