SEK declines on disappointing inflation

Summary:

• Core price growth misses expectations in August

• Riksbank seems to be unlikely to pull the trigger this year

• Political outlook clouds

• Further drop contained given crowded short positioning

The Swedish krona has been by far the worst performing major currency thus far this year and taking into account the unfavourable political backdrop in conjunction with recent disappointing inflation numbers one may suppose that the currency is unlikely to recoup much of its losses. Thus, the Riksbank expectations suggesting a rate hike taking place either in December or February now appear to be tilted to the later date. The krona has slid to some extent but a decline has not been substantial probably due to crowded short positioning.

Core price growth in Sweden remains a challenge for the Riksbank acting not in favour of an onset of monetary tightening this year. Source: Macrobond, XTB Research

Inflation measured by CPI grew 2% in annual terms in August falling short the medina estimate of 2.2%. At the same time, CPIF which is based on constant interest rates climbed 2.2% being also below the consensus at 2.3%. What is even more important, core CPIF stripping out energy prices decreased to 1.2% from 1.3% in July highlighting a challenge ahead of the Swedish central bank which had predicted the unchanged number. Admittedly, the Riksbank targets 2% measured by CPIF but this measured is biased by changes in energy prices and offers a less constructive view with regard to domestic inflationary pressures. Therefore, by focusing on core CPI one may be provided with more information regarding inflationary pressure built in the domestic economy. The details bared that we had two major sources of the disappointing overall release. The first came from culture and leisure where prices dropped 3.4% in monthly terms while the second negative contribution was transport where prices decline 1.7% on a monthly basis as well.

On the other hand, clothes and footwear prices jumped as much as 5.1% reflecting in part a huge decline of 6.6% a month earlier. Looking at the chart above one may call into question a possibility of the first rate rise yet this year. However, does it mean further pain for the SEK? Not particularly as short positioning remains outstandingly crowded and the currency seems to have little space to decline more severely from the current levels. Finally, the political outlook and a probable further postponement of the monetary tightening cycle should prevent the krona from undue strengthening in spite of the fact that the former event is expected to have a limited effect on the Swedish economy (each party sticks to a relatively strict view as regards fiscal policy suggesting that the economy should continue producing budget surpluses and thereby reducing its debt in the months to come).

The EURSEK fell appreciably last week in anticipation of elections. Nevertheless, the pair has resumed rising since the beginning of this week in response to the inconclusive elections’ fallout. Thus, the most probable scenario for the pair right now seems to be climbing toward the crucial resistance in the neighborhood of 10.70 where investors may decide to book their profits launching a corrective wave afterward. Source: xStation5