Policy Outlook and Market Expectations
We see the Riksbank holding its policy rate at 1.75% at its upcoming meeting, marking the sixth consecutive hold. The market is pricing in a 25 basis point hike by year-end, but we expect the central bank will signal this is unlikely. This disagreement between the market and the bank’s likely path creates a clear opportunity. The case for an extended hold is supported by recent data showing Sweden’s benign inflation and spare economic capacity. May’s CPI reading came in at 1.7%, continuing a trend of inflation running below the 2% target, while unemployment figures recently edged up to 7.9%. These statistics give the Riksbank little reason to consider tightening monetary policy any time soon.Currency and Rate Market Implications
For derivative traders, this points to positioning for a weaker Swedish Krona in the coming weeks. With the European Central Bank signaling a firmer policy stance, the policy divergence should weigh on the SEK. We believe buying EUR/SEK call options is an effective way to position for a move higher in the currency pair. There is also a compelling trade in the Swedish interest rate markets. Forward contracts are currently reflecting rate hike expectations that we view as misplaced. Traders could look to receive the fixed rate on short-term interest rate swaps, which would profit as the market reprices its expectations lower. Historically, when a central bank’s true intentions diverge from market pricing, the currency adjusts quickly once the message is clarified. We have seen this pattern lead to sharp moves as traders are forced to unwind positions built on incorrect assumptions. A firm signal of an extended hold from the Riksbank could trigger just such a move.Start trading now — click here to create your real VT Markets account.
