SEK: Higher Core CPI Boosts Krona's Prospects Amidst Currency Crisi

SEK: Higher core CPI good news for SEK

In the midst of a quasi-currency crisis in Sweden over recent weeks, we had indicated today’s CPI release as a potentially pivotal moment for the krona. This proved to be the case. Both core and headline inflation for May came in hotter than expected: YoY readings were 9.7% for CPI (exp. 9.5%), 6.7% for CPIF (in line with consensus), and 8.2% for CPIF excluding energy (exp. 7.8%). This last core gauge is the one that the Riksbank is mainly focussing on: it declined faster than expected in April, from 8.9% to 8.4%, but it clearly decelerated it slowdown in May, to 8.2%.

 

The implications for monetary policy, and for the krona, are non-negligible. A key reason behind the recent SEK weakness was effectively the lack of support by the Riksbank after a dovish turn at the April policy meeting. Since then, except for verbally protesting a weak krona, the Bank had failed to offer a convincingly supporting narrative to the domestic currency (i.e. via rebuilding some hawkish narrative).

 

These higher inflation numbers offer an opportunity for the two dissenters to scale back their dovish opposition at the 29 June meeting and to allow rebuilding of that hawkish messaging (hike and signal more to come) that can help a more sustained recovery for SEK.

 

We cannot unsee the significant domestic downside risks for SEK (SBB, troubled economic and real estate outlooks), but the Riksbank has an opportunity to give a lifeline to the krona and wait for more market stabilisation to do the heavy lifting and bring EUR/SEK closer to 11.00 later in the year.

 

We are slightly more constructive on the EUR/SEK near-term outlook after today, although we warn against excessive confidence in the Riksbank adopting what we see as the best policy for the currency. Risks of spikes to 11.60-11.70 remain elevated, but a hawkish Riksbank could now take the pair sustainably below 11.50 by the summer.