The Swedish krona is on course for a fourth consecutive day of gains as investors continue to respond with positivity to this week’s revised inflation forecasts.
By midday in London, the krona had strengthened to 10.213 versus the euro and to 8.735 versus the dollar – its strongest levels since the middle of last month.
Speaking on Tuesday, the Riksbank said it now expects inflation of 2.1 percent in Sweden for this year and next, from previous estimates of 1.9 percent for both years. In addition, one of the bank’s six executive board members favours an immediate quarter-point hike in Swedish interest rates.
Traders are now inclined to believe the Riksbank when it says it will commence with a cautious process of monetary policy tightening later in the year. Of the world’s major central banks, the Riksbank has been among the most dovish in recent years; it is one of only three central banks globally to uphold negative interest rates (-0.5 percent).
“I don’t see why they can’t move [on rates],” the Bank of Montreal’s Stephen Gallo told the Financial Times.
Among factors supporting the inflation outlook has been the krona itself (its remarkable weakness in the first half of 2018 was a blessing for Swedish exporters) and higher energy prices. The most economically important krona exchange rate, EUR/SEK, traded at a nine-year high (krona low) in May; meanwhile, “front month” brent and WTI crude futures are trading per barrel at $78.20 and $74.50 respectively, near multi-year highs.
“The krona exchange rate has developed more weakly than expected and together with more rapid energy price increases, this will contribute to higher CPIF inflation in the year ahead compared with the previous assessment,” the Riksbank’s July policy report said.
According to analysts, the biggest threat to the growth-sensitive krona is likely to be an escalation in global trade tensions.