Sweden's Krona May Be Underestimating Risk of a Hawkish Riksbank

(Bloomberg) -- The Riksbank may throw a bone to krona bulls even as it keeps rates on hold tomorrow.

The main risk scenario is that the central bank raises the probability of a interest-rate increase in December, something that could spark a rally in the Swedish currency, according to Credit Agricole SA, ING Groep NV and Banco Bilbao Vizcaya Argentaria SA.

“We think the market is under-pricing the risk of a more hawkish Riksbank, which makes sense when considering that they have surprised on the dovish side for a while,” said Credit Agricole strategist Manuel Oliveri.

Credit Agricole’s base case is for a hike in December and that implies that there is room for rising rate expectations to the benefit of the krona, which they see advancing by more than 2 percent to 10.10 against the euro by the end of the year. Rabobank sees it heading toward 10 within six months.

Sweden's Krona May Be Underestimating Risk of a Hawkish Riksbank

The krona rallied by the most since July on Oct. 11 after inflation data surprised to the upside, boosting the prospects of an interest-rate hike by the central bank for the first time in seven years. In September it said borrowing costs may be raised by 25 basis points in December or February.

Analysts see modest gains for the currency in coming months and the median forecast is for the krona to trade at 10.25 against the euro by year-end. All 24 analysts in a Bloomberg survey expect the Riksbank to keep its key policy rate at minus 0.5 percent tomorrow.

Here are some strategist views:

ING economist Jonas Goltermann
The market risk into tomorrow’s meeting is tilted toward a marginally hawkish reaction. First off, Deputy Governor Martin Floden is likely to vote for a hike, taking the count to 4-2. More broadly, nothing much has happened since September (stronger core inflation probably trumps softer growth) to change the new, somewhat more hawkish stance from Governor Ingves, so it seems reasonable to expect the statement and press conference will be relatively bullish, which could shift perceptions toward a December hike
Rabobank strategist Jane Foley
On the back of a stronger-than-expected September CPI inflation release, there is a strong expectation in the market that the Riksbank could hike rates before the end of the year and that this risk could be clearly communicated at the October 24 policy meeting. Assuming the Riksbank tightens policy in the coming months, Rabobank sees scope for EUR/SEK to edge back toward 10.00 on a 6 month view
Handelsbanken strategist Kiran Sakaria
“We don’t expect any drama around the decision as the Riksbank is content with how the market has moved after its September meeting. A bit over one hike is priced in by February and we believe they will leave both December and February open for the first hike as long as the economy develops as expected”
BBVA head of G-10 FX strategy Roberto Cobo Garcia
The krona would have scope to appreciate if there is a hawkish tweak in the communication, while an unchanged tone would not lead to any significant reaction as the market is just pricing in around 15% probability of a hike in December. Furthermore, there will still be two more CPIF releases before the December meeting, and for now it is still too early to call whether the Riksbank’s hawks could get additional backing for a December rate hike

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