In a busy week for central bankers, investors are on the lookout for details about when interest rates could be going up in continental Europe, where the monetary policy normalization process lags well behind the U.S. Federal Reserve.
With the European Central Bank vowing to keep rates at present levels at least through next summer, Sweden’s Riksbank will be in focus when its policy makers meet on Wednesday. At its September meeting, the Stockholm-based central bank indicated rates would remain unchanged in October but pointed to a likely increase in December or February.
Following a “stronger than expected September consumer price inflation release, there is a strong expectation in the market that the Riksbank could hike rates before the end of the year,” wrote Jane Foley, senior FX strategist at Rabobank, adding that Wednesday’s meeting in Stockholm should give further guidance.
In September, CPI rose 0.5%, more than expected, to a year-over-year rate of 2.3%, compared with 2.2% forecast and the Riksbank’s 2% target. This could give the central bank more than enough reason to be hawkish, market participants said, even though volatile energy costs are thought to play a big role in the upward push of the inflation indicator.
Bank of America analysts urged selling the euro-krona EURSEK, +0.5010% cross as the Swedish currency is becoming more attractive, while Foley sees the pair edging toward 10 krona per euro area over the next six months, compared with 10.3676 on Tuesday. On the year, the euro has gained 5.5% on the krona, more than against any other major currency with the exception of the Australian dollar EURAUD, +0.1976% according to FactSet.
One dollar last bought 9.0275 krona USDSEK, +0.3466% having climbed more than 10% against the Scandinavian tender so far this year.
“The removal of the ECB QE-wedge is likely to see the krona recalibrate to its historical correlations,” according to the BofA analysts. The ECB is in the process of winding down the asset purchases at the heart of its quantitative easing program, with the aim of ending the purchases in December. ECB policy makers meet Thursday.
Still, “the Riksbank will be concerned about the FX risks associated with tightening policy ahead of the ECB,” said Foley.
If sluggishness takes hold in the eurozone, the ECB could wait even longer with its first rate hike, and then Riksbank would have awkwardly frontrun its Frankfurt-based peer, leaving Sweden in a potentially precarious situation. After all, Sweden’s economy is small and open, leaving it very dependent on the eurozone, she added.
Recent economic data from the eurozone has called in question whether the first signs of a slowdown are starting to show. And sustained sluggishness could feed back to Sweden, said Foley.
So for euro and krona traders alike, Thursday’s ECB meeting will be important.
Investors will be looking for further details about the QE wind-down on, as well as ECB President Mario Draghi’s assessment of the risks associated with Italy’s budget plans, which have stoked fears of a showdown with the European Union over the bloc’s fiscal rules.
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