In a surprise move, earlier today Sweden’s Riksbank announced that it would expand the country’s QE program by another 45 billion kroner – consensus was for no increase – while keeping its rate at the already record negative -0.50%. “With continued expansionary monetary policy abroad, there is a risk that the krona will appreciate earlier and faster than in the forecast,” the Riksbank said.
Even more surprising was the currency reaction: instead of weakening the SEK, the currency strengthened and initially traded as much as 0.8 percent higher against the euro, but gains were pared to 0.3 percent as of 11:26 a.m. in Stockholm. The move was another indication of just how inverted cause and effect relationships have become in a world in which traders try to front and in this case back-run central bank announcements.
The extra purchases will add to an existing 200 billion-krona QE program targeting about one-third of Sweden’s nominal government bonds by the end of June. Riksbank Governor Stefan Ingves has resorted to unprecedented stimulus as the bank has failed to reach its 2 percent inflation target for about half a decade. But policy makers are torn over how best to deploy their toolbox as the property market overheats.
This is what the Riksbank said:
The Riksbank’s monetary policy has contributed to stronger economic activity and rising inflation. But although inflation is rising, the upturn is fitful. At the same time, there is still uncertainty over global developments and monetary policy abroad is very expansionary. To safeguard the rising trend in inflation, monetary policy in Sweden needs to continue to be expansionary. The Executive Board has decided to purchase government bonds for a further SEK 45 billion during the second half of 2016. This will reduce the risk of the krona appreciating faster than in the forecast and of a break in the upturn in inflation. The purchases cover both nominal and real government bonds, corresponding to SEK 30 and SEK 15 billion, respectively. The repo rate is at the same time held unchanged at -0.50 per cent. There is still a high level of preparedness to make monetary policy even more expansionary if this is needed to safeguard the inflation target.
Apparently the market did not agree with the Riksbank’s assessment, and as a result of the surprising strengthening in the SEK, The krona remains the strongest performer, besides the yen, of the 10 currencies tracked in Bloomberg Correlation Weighted Indexes over the past year.
As Bloomberg noted, “Sweden’s Riksbank just put its monetary policy cards on the table in the hope that the European Central Bank won’t blow its best intentions to smithereens.
Swedish policy makers delivered a little more stimulus and made a few predictions about the future. But ultimately, all they can do now is hope ECB President Mario Draghi doesn’t upend everything for those outside the euro zone struggling to protect their currencies.
What the Riksbank does next “depends to a large extent on the ECB,” said Knut Hallberg, an analyst at Swedbank. “If they breathe a word of being prepared to do more, then the pressure on the Riksbank will rise again.”
Andreas Wallstroem, an economist at Nordea Bank AB, said his “main scenario is that we will see no additional easing measures from the Riksbank in this cycle.” Nordea forecasts the first rate increase will come in the second quarter of next year. “However, as we don’t see that inflation will rise to the 2 percent target within the forecast horizon, further easing measures cannot be ruled out.”
“The pressure could mount already this afternoon should the krona strengthen on the back of the ECB decision,” he said. The Frankfurt-based bank is due to publish its rate decision later today, with economists surveyed by Bloomberg predicting no change.
As Bloomberg adds, Sweden is enjoying an economic boom with growth rates in excess of 4 percent. A number of analysts have questioned what impact more easing will have on an economy steaming ahead at such a pace.
The Riksbank is “caught between a domestic economy that is booming while uncertainty in the rest of the world and the financial markets will continue to exert pressure on the Swedish krona and inflation,” said Joergen Kennemar, an economist at Swedbank. “In particular, the more expansive stance of the ECB, but also the Fed, could force the Riksbank to reverse its course of a scale-back monetary policy. Thus, if the ECB and the Fed prevail, the pressure will again arise late this year or early next year.”
Then again, perhaps there is a reason for the stronger SEK response: as Danske Bank notes, perhaps the Riksbank has introduced a mini taper:
— Danske Bank Research (@Danske_Research) April 21, 2016
#FX markets: "Has the #Riksbank introduced 'mini-tapering'?" QE
program of SEK45bn (less than 50bn). #EURSEK— Danske Bank Research (@Danske_Research) April 21, 2016
Finally, here was Goldman’s take:
- Contrary to our expectations, the Riksbank has extended the QE program by a further SEK45bn during the second half of 2016 (SEK30bn of nominal government bonds and SEK15bn of real government bonds).
- Given the economic and inflation outlook, we had expected the Riksbank to tolerate a weaker currency (up to EUR/SEK 9.10-9.05) and to refrain from taking any action at this stage. However, the Riksbank’s announcement today shows that the threshold for a faster appreciation of the currency is lower.
- The initial market reaction has seen the SEK appreciate, contrary to what the Riksbank had hoped to achieve.
- The only possible explanation for this, beyond positioning, is that the market thinks the central bank is now running out of bullets in its attempt to control the pace of SEK appreciation.
- The Riksbank has shown that it continues to be worried about the pace of appreciation. As we have written elsewhere, we do not rule out that the central bank could cut rates further or even engage in opportunistic interventions in the currency market. So, at these levels, tactically we do not see much value in going long the currency. That said, the trend is for the SEK to appreciate, and we would therefore see any depreciation as a window of opportunity to take the other side.
The move may be accentuated depending on what the ECB announces in just over half an hour.
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