Summary:
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Riksbank minutes lift the Swedish krona pointing to further gradual rate hikes
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Sweden saw a budget deficit in December, the overall outlook remains encouraging though
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Option traders doubt the SEK may appreciate in the upcoming months
Riksbank expected tighten policy gradually
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Open account Try demo Download mobile app Download mobile appThe minutes of the Riksbank policy meeting held on December 19 released this morning confirmed the next rate hike might occur during the second half of 2019. “A majority of the Executive Board supported the picture of the economic outlook and inflation prospects described in the draft Monetary Policy Report”, the document said. Members admitted that “resource utilisation remains high, even though outcomes for GDP growth and inflation have been weaker than expected” implying that price pressure should continue rising. On the other hand, a lot of uncertainties still lie ahead, as the Riksbank stressed pointing chiefly to external developments. Moreover, some board members brought up a topic regarding the housing market and associated risks as well as the high level of household indebtedness. These areas seem to be remarkably sensitive to higher borrowings costs. According to the account Deputy Governor Per Jansson, who voted against a rate increase last month, justified his decision referring to “the considerable uncertainty remaining over the strength of the more persistent rate of inflation,” In our view the overall tone is rather neutral as we were offered no surprises in terms of a pace of further rate increases. The SEK is trading slightly higher both against the euro and the US dollar as of 9:15 am GMT.
Solid budget balance
The Swedish general government balance saw a surplus of 1.7% in December. Source: Macrobond, XTB Research
At the same time we knew the newest data regarding the general budget which saw a deficit of 78.3 billion SEK in December, close to expectations. However, looking at a 12-month rolling sum December brought a surplus of 80 billion SEK, down from 89 billion SEK in November. This resulted in a surplus of 1.7% of GDP, down from 1.9% in November. The broader view with regard to the Swedish general government balance remains optimistic as evidenced by the chart above. Let’s recall that Sweden has been unable to forge a new government following September’s inconclusive election. Last week Swedish Social Democratic leader Stefan Lofven called on parties to break a deadlock highlighting that next several days would be decisive in talks.
Technical outlook
While the gains seen in the aftermath of the Riksbank minutes have been moderate, the longer-term outlook for the SEK remains promising in our eyes. Focusing on the USDSEK we see that the pair has been unable to break through 9.20 in recent months increasing odds to see a reversal in the weeks to come. Furthermore, we may arrive at a conclusion that option traders doubt the SEK might appreciate from the current levels looking at the curve depicting risk reversals. In the medium-term the USDSEK may head toward 8.53 where the nearest target might be localized. Source: xStation5
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