Riksbank Meets Tuesday, Market Risks Disappointment

In recent days the Swedish krona has been among the strongest of the major currencies. It continues to trade like a high beta euro in the sense that it seems to move in the same direction of the euro but more so. The recent low in the euro was in the middle of last week near $1.2950. The dollar's high against the krona, the highest since last December, was recorded the same day near SEK7.0250.

October 31 was the last time the euro traded above $1.40. Between that day and the middle of last week, the Swiss franc was the weakest of the major currencies, falling 8% against the greenback. The Scandi currencies, Norway and Sweden lost a little more than 7%, while the euro lost about 6.3%.

Norway's central bank surprised the market by delivering a 50 bp rate cut on Dec 14. The krone has appreciated against the dollar and the euro since the move.

The Riksbank meets tomorrow. Opinion appears to be split between stand pat and a 25 bp cut, though small number appear to look for a repeat of Norway's 50 bp move. We think there is scope for disappointment and suspect standing pat is likely than a 50 bp cut.

Arguing against an aggressive move is the fact the economy continues to be quite resilient. Third quarter growth came in at 4.6% (year-over-year) down ever so slightly from the 4.8% pace seen in Q2. Moreover Q4 is off to a respectable start, with retail sales rising 0.4% in Oct, offsetting in full the Sept decline and well above market expectations.

Sweden's trade surplus is also continuing to hold up better than expected. The monthly trade surplus has averaged SEK7.28 bln this year and the Oct print was slightly better than this at SEK7.8 bln and nearly a quarter better than the market consensus. For comparison purposes, note that Sweden's average monthly trade surplus in 2010 was SEK5.85 bln.

Those participants looking for more aggressive Riksbank action are emphasizing the fact that sentiment surveys are deteriorating. The Swedbank PMI survey has been trending lower all year, peaking in Jan at 61.5 and by the Nov reading had slumped to 47.6, the fourth month below the 50 boom/bust level.

In addition the core of inflation has eased to 1.1% in November, which matches the lowest level since late 2007. The headline rate is just below 3% and appears to be rolling over. The combination of base effects and softer energy prices should allow Sweden's headline inflation to fall further in the months ahead, which is also true of other European countries, including the euro zone and UK.

The key to the krona's outlook may not be so much in what the Riksbank does. As we see with Norway, even a larger than expected cut had only fleeting impact. The main driver of the krona's direction is the performance of the euro. Ahead of the first 3-year repo operation on Wednesday, the holiday thin market may be reluctant to take the euro far from prevailing levels (~$1.3025).

Technically, it may appear that the dollar put it a double top against the krona just above SEK7.0, which was seen in late Nov and last week. However, the neckline, which is the key to confirmation, is not found until SEK6.7.

If the analysis here is accurate and the euro's rise is but a short reprieve, the dollar should hold above SEK6.85.