SEK: Reinforcing the bullish view – SocGen

In view of Alvin T. Tan, Research Analyst at Societe Generale, the latest April inflation data release out of Sweden reinforced their bullish medium-term view of the Swedish krona.

Key Quotes

“With the Frexit risk evaporating with Macron's victory in the French presidential election, the market focus is increasingly turning to the potential for monetary policy shifts in Western Europe, particularly towards tightening.”

“The Swedish economy has been performing well for some time now, but the Riksbank has kept its dovish policy bias, given its lack of confidence about the durability of the reflation trend in the country. This caution was not unwarranted, as we have seen how stronger growth has not translated into much higher inflation pressures outside Sweden. Moreover, the Riksbank has its own bitter experience from 2011-12, when headline CPI toppled from 3% to under 0% in a span of 15 months.”

“Although the Easter holiday likely boosted the April inflation readings temporarily, the deflation threat in Sweden is undoubtedly receding as economic growth gathers pace. The persistence of the growth and reflation momentum in the coming months should nudge the Riksbank to shift its policy bias. To be sure, further gains in inflation in Sweden are likely to be slow and incremental, which means that the Riksbank will be proceeding cautiously. The underlying CPIF inflation, for example, is still struggling to climb above the 2% target. Moreover, the just-concluded wage-setting round in Sweden between industrial sector unions and employers agreed to modest pay rises of 2% per year for three years. This highlighted that price stability remained well anchored in Sweden despite the strong growth performance and tightening labour market.”

“We expect the ECB to shift to a balanced risk outlook in June 2017, and announce another reduction of its asset purchase programme in the following September. Given this view, we also expect the Riksbank to follow suit and shift to a more balanced outlook in 3Q17. The split 3-3 vote in April to extend the Riksbank's asset purchase programme into year-end revealed the growing dissent against the continuation of ultra-loose monetary policy in the face of strong growth and escalating house prices.”