PoundSterlingLIVE - Despite raising interest rates again, Sweden will still have the lowest real policy rate in the G10 space according to one analyst, which can explain why the currency can weaken further.
The Riksbank raised interest rates by 25 basis points and said a November hike is possible as inflation remained "too high".
It also spent a great deal of time communicating its frustration with the weak valuation of the Swedish Krona and released projections showing it expects an appreciation over the coming months.
But Pär Magnusson, Chief Rate Strategist, says the central bank is "behind the curve" on doing what is required to stem Swedish inflation and inflate the currency.
"The Riksbank did it again. It wanted to achieve a stronger SEK, while avoiding bringing further rate hikes that will punish an ailing Swedish economy, but the opposite seems more probable," he says in a post-decision note. "It fell 'behind the curve', and will likely once again have to play catch-up with the market."
In a special document covering the Krona, the Riksbank said it is undervalued and investor speculation played a big role in this regard.
But, "economic developments in Sweden in relation to other countries suggest it will appreciate going forward, even though it is difficult to predict how much and when," said the central bank.
"By projecting a SEK appreciation and rather sharp decline in core inflation the Riksbank has set itself up for failure. There is hardly any room for forecasting mistakes, which makes a hike in November likely," warns Magnusson.
The Krona initially rallied on the Riksbank's decision and guidance but soon pared most of that advance: the Pound to Krona dipped as low as 13.5952 before recovering to pre-decision levels at 13.7083.
The Euro to Krona dived to 11.7507 before recovering to 11.8921, and the Dollar to Krona fell to 11.0326 before recovering to 11.1610.
"We saw a brief dip in EUR/SEK below 11.77 in the immediate aftermath of today’s communication, but right now the cross has returned higher than it was before the Riksbank’s statement this morning. So
much for that FX intervention effect," says Magnusson.
SEK's inability to hold its gains might have a lot to do with the Riksbank's latest projections showing a 25bp hike and only another 10bp was likely by Q2 next year in the policy rate path, "which is decidedly on
the dovish side, as it’s only 5bp more than in the June forecast," says Magnusson.
This, he says, puts the central bank behind the curve.
The outlook facing the Krona and the central bank is challenging concedes the Swedbank analyst as the Riksbank will come under pressure to hike at the same time as other macrodata probably will deteriorate.
"Unemployment numbers that came out in Sweden yesterday were a major negative surprise relative the consensus expectations, but it shouldn’t be surprising that the Swedish labour market is headed for bad times. The combination of another hike and a slide into deeper recession is a recipe for relative curve flattening," he explains.
The combination of a timid central bank and deteriorating macroeconomic fundamentals creates a difficult cocktail for the SEK.
An original version of this article can be viewed at Pound Sterling Live
