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Given the recent weakening of the SEK and a rise in oil prices, a pronounced uptick in the overall CPI inflation numbers is anticipated but more subdued developments in ‘core’ measures such as CPIF excluding energy. In Sweden, the week ahead provides some long-awaited data on inflation (scheduled on Tuesday).
This is the final piece of (meaningful) information the Riksbank would receive before its upcoming monetary policy meeting on Tuesday 20 December (decision to be published 21 December), so its importance should not be underestimated. Our forecasts for November CPIF and CPIF excluding energy are 1.56% YoY and 1.21% YoY, respectively.
Whereas, the consumer prices in the Euro Area are expected to increase by 0.6 pct YoY in November 2016, following a 0.5 pct growth in the previous month and in line with market consensus.
The ECB’s bond purchases affect the signaling function of market prices. It is, therefore, uncertain whether rising market measures for long-term inflation are due to distortions caused by the ECB or are the result of the view of many well-informed market participants.
Over the past few weeks, Swedish data has clearly stabilized and there are even hints of reacceleration.
However, so far, the improvement seems to be confined to industrial sectors, which leads us to believe that it is the result of a recent weakening of the SEK.
We saw further signs of an industrial upswing over the past week, as both production and orders developed strongly.
To be specific, it is the low value added commodity-related industries that seem to be enjoying the strongest boom currently. We have yet to see amelioration in consumption or inflation but next week should provide some input on possible currency effects on inflation from the weak SEK.
Thus, capitalizing on momentary gains in EURSEK, we continue to maintain the following FX hedging portfolios via option spreads; we’ve just considered this option strategy with shorts in 2w (1%) ITM put with positive theta or closer to zero while buying 1m (0.5%) OTM put option; the strategy could be executed at net credit.
