The political landscape in Sweden is bubbling. One week ago Prime Minister Stefan Lofven, who wanted to remain in office until a new government had been formed, was voted out in a parliamentary vote. The centre-right coalition and the populist Sweden Democrats agreed on that. As expected it is nonetheless turning out to be very difficult to form a government. The speaker of the parliament has now given the leader of the centre-right alliance Ulf Kristersson the opportunity to find sufficient support to be elected as Prime Minister over the next two weeks, even with a minority government. Only after four unsuccessful attempts to elect a cabinet in parliament, early elections can be called.
However, political difficulties are not an issue for SEK. What matters for the krona is when Riksbank will start its rate hike cycle. At its September meeting it suggested that rate steps might take as long as February rather than December. In view of the fact that SEK appreci-ated over the past weeks (by approx. 3% since the end of August) Riksbank might increas-ingly lean towards February for fear of an even stronger appreciation. Let’s wait and see what the inflation data will look like next Thursday, but on 24th October Riksbank will have to comment quite clearly if it was to prefer December after all, since the October meeting would be the last opportunity to prepare the market for a rate hike towards year-end. In my view the Riksbank would be able to package this signal sufficiently dovish to avoid strong krona appreciation towards year-end. That means a dovish rate hike in December would be possible, but I have my doubts that Riksbank will have the courage to do so.
However, political difficulties are not an issue for SEK. What matters for the krona is when Riksbank will start its rate hike cycle. At its September meeting it suggested that rate steps might take as long as February rather than December. In view of the fact that SEK appreci-ated over the past weeks (by approx. 3% since the end of August) Riksbank might increas-ingly lean towards February for fear of an even stronger appreciation. Let’s wait and see what the inflation data will look like next Thursday, but on 24th October Riksbank will have to comment quite clearly if it was to prefer December after all, since the October meeting would be the last opportunity to prepare the market for a rate hike towards year-end. In my view the Riksbank would be able to package this signal sufficiently dovish to avoid strong krona appreciation towards year-end. That means a dovish rate hike in December would be possible, but I have my doubts that Riksbank will have the courage to do so.
