Swedish Krona Set for Bumpy Ride on Volatile January Inflation
(Bloomberg) -- The krona, the worst-performing major currency this year, faces volatility on Swedish inflation data Tuesday as markets may be underestimating the risk for a surprise.
January is the month of the year with the most volatile inflation data, according to SEB AB, yet a gauge of one-week price swings in the euro-krona exchange rate suggests traders are relatively complacent.
One-week implied volatility in the cross is trading around 50 basis points below its one-year average, while the relative premium to own exposure into short-term risks stands below par, suggesting investors can hedge themselves through relatively under-priced option plays.
The krona has been battered this year by skepticism that the country’s central bank can stick to a plan to hike interest-rates in the second half of the year. Inflation is the second-biggest driver for the krona among Swedish data and events, after Riksbank policy announcements, according to Karl Steiner, a strategist at SEB.
The krona was up 0.2 percent at 10.4613 per euro on Monday, gaining for a second day. The currency is still down 3 percent against the common currency this year.
“Stars seem to be aligning for out-sized moves in the krona considering the event risks that lie ahead,’’ said Fredrik Lockne, an options specialist at SEB. “Implicit volatility looks rather cheap, in particular over the two-week tenor which captures both inflation and growth data.’’
January data has the most clear bias for downside surprises in headline inflation, at 71 percent of the time over the past seven years, SEB said. Swedish consumer prices are forecast to have dropped 0.7 percent in January on a monthly basis, from a 0.4 percent rise in December, as many stores cut prices after Christmas holidays. Inflation is forecast at 2.2 percent in annual terms, versus 2.0 percent in December.
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