Swedish Krona Month Outlook (1 – 3 Months)– 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, notes RBC Capital Markets. 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, SEK appreciation seems to be capped and expect EUR/SEK to remain range bound between 9.30 - 9.40 for now, says RBC Capital Markets.