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The Riksbank meeting was decisively bearish for SEK as currency weakness was dismissed as temporary and hence the near-term inflation (CPIF) forecast wasn’t revised up materially, only by 0.16%pts for the end of 2018 (we had expected a revision of some 0.3%pts for this year and the next).
More importantly, the rate path was actually lowered by 10bp for 2019 and 3bp for 2020 due to a more cautious assessment of core CPI.
The delay in tightening despite a currency that was 6% cheaper than the central bank expected in the previous MPR signals that the currency continues to lack an effective or credible policy backstop.
Investors have been reluctant to fund in SEK despite its low yield because they have been focused on the risk of a policy pivot and a mean reversion higher in the currency.
But with that policy pivot being called into question for potentially yet another calendar year, we suspect SEK could evolve into a more active funding currency.
We’ve been consequently re-instating a bullish NOKSEK position after the policy meeting through a bullish seagull.
Bought a 2m NOKSEK 1.0850-1.10 call spread, sold a 2m 1.06 NOKSEK put, Reverse knock-In spreads 1.0450 on April 26th. Net premium 10bp, marked at 22bp. Courtesy: JPM
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