Admittedly, we have not ranked among those who have taken a bet on another rate cut by the Riksbank but rather argued for longer a stay-on-hold scenario (until summer 2016). True, the ECB eased and announced asset purchases after the latest Riksbank policy meeting. The reason we have not seen another rate cut as an interesting enough case is that our inflation forecast has not deviated from the Riksbank’s projection in any meaningful way. Inflation is now obviously at the core of the Riksbank’s thinking.

One of the perceived doves (Ekholm) has left the board and it is not clear if a new board member will be appointed before the next policy meeting (27 October with the policy announcement the day after). Nevertheless, many other board members (Flodén, Jansson, Skingsley and also af Jochnick) have expressed readiness to act again if inflation drifts away from the target again (or if the economic deteriorates). To ensure that inflation moves back towards the target is the prime objective.

The September CPIF outcome (0.3% y/y) is 0.4 percentage points below the Riksbank’s projection. That is a lot. However, more importantly, the September data shows considerable softness in almost all goods and services components. Seasonal price increases in clothing and shoes are much lower (after a high August reading though). A few other ‘downside’ factors include food, furniture and household equipment, health services, cars, recreation and culture, transport services.

We have two other observations. First, services price inflation (excluding housing), which popped up in April from a cyclical low the month before, has in recent months not been able to come up any further. Goods inflation is back in negative territory. Second, the krona – the trade weighted KIX index was 6.7% weaker in September than a year earlier. Imported inflation showed some tendencies to move higher earlier this year but more recently that seems to have stopped. Imported inflation was -1.0% y/y in September.

So, yes, probabilities have moved in favour of a rate cut and possibly a further postponement of future hiking plans (currently starting late next year). So, the question is how much? It is no longer a matter of moving in steps of 25bp. The ECB has mentioned that its refi rate level (5bp) in practice is equal to the zero-bound level. It is possible that the Riksbank wants to avoid getting to the zero bound rate and decides to go for 15bp down to 0.1%.

We keep our recommended positions, at least for the moment. However, the combination of being long BEI 3102 and receiving SEK 2Y2Y has naturally been hit today and we advise to add more risk to the swap in the position. The 5s10s curve flattener has suffered one basis point but as the 5Y point (0.40%) gets lower, the position should benefit amid lower interest rates going forward. The 10Y ASW is moving sideways whereas the FRA spread has flattened a tiny half basis point.

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Recommended Content


Recommended Content

Editors’ Picks

USD/JPY pops and drops on BoJ's expected hold

USD/JPY pops and drops on BoJ's expected hold

USD/JPY reverses a knee-jerk spike to 142.80 and returns to the red below 142.50 after the Bank of Japan announced on Friday that it maintained the short-term rate target in the range of 0.15%-0.25%, as widely expected. Governor Ueda's press conference is next in focus.  

USD/JPY News
AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD attacks 0.6800 in Friday's Asian trading, extending its gradual retreat after the PBOC unexpectedly left mortgage lending rates unchanged in September. A cautious market mood also adds to the weight on the Aussie. Fedspeak eyed. 

AUD/USD News
Gold consolidates near record high, bullish potential seems intact

Gold consolidates near record high, bullish potential seems intact

Gold price regained positive traction on Thursday and rallied back closer to the all-time peak touched the previous day in reaction to the Federal Reserve's decision to start the policy easing cycle with an oversized rate cut.

Gold News
Ethereum rallies over 6% following decision to split Pectra upgrade into two phases

Ethereum rallies over 6% following decision to split Pectra upgrade into two phases

In its Consensus Layer Call on Thursday, Ethereum developers decided to split the upcoming Pectra upgrade into two batches. The decision follows concerns about potential risks in shipping the previously approved series of Ethereum improvement proposals.

Read more
Bank of Japan set to keep rates on hold after July’s hike shocked markets

Bank of Japan set to keep rates on hold after July’s hike shocked markets

The Bank of Japan is expected to keep its short-term interest rate target between 0.15% and 0.25% on Friday, following the conclusion of its two-day monetary policy review. The decision is set to be announced during the early Asian session. 

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures