RBA and Riksbank: Hawkish surprise coming? - Rabobank

Tomorrow brings policy meetings from both the RBA and the Riksbank and the statements of both will be carefully evaluated for any hawkish signals, according to the analysis team at Rabobank.

Key Quotes

“Last week, the SEK was the best performing G10 currency as the market reacted to speculation that the Riksbank may drop its dovish bias at tomorrow’s policy meeting. This is a view with which we concur.  This morning’s release of Swedish June PMI at 62.4 from 58.8 in May highlights the strength in the economy which in recent weeks has also been reflected in other data.  In particular both the Riksbank’s Business Survey published in Mid-June and TNS Sifo survey on inflation expectations signalled that price pressures could be about to turn higher.  The TNS Sifo survey, which was commissioned by the Riksbank and published on June 14 showed a broad rise in inflation expectations relative to the findings in the previous quarter.  On a 5 year horizon, the survey shows inflation expectations pushing above the 2.0% y/y level.  The rise in presumed price pressures was despite the easing in May CPI inflation to 1.7% y/y from 1.9% y/y in April which represents the fading in the influence of last year’s rise in oil prices.” 

“According to the Riksbank’s Business Survey, Swedish export companies are encouraged by ever-stronger demand from aboard, with Europe standing out in particular. The survey suggests that export companies see no sign of a slowdown in the next 6 months.  Although competition is serving to keep a lid on prices for some companies, several manufacturers reported that due to the strength of demand, there was an opportunity to raise prices in the period ahead. At its last policy meeting back in April the Riksbank reported slightly lower wage increases than had been expected.  Low wage inflation is an issue in several G10 economies suggesting structural issues are at play.  In the absence of firmer wage rises, core inflationary pressures will be subdued, suggesting there is no rush for the Riksbank to tighten policy settings.  That said, Swedish monthly earnings data are running at a rate of around 2.2% y/y in recent months which represents a notable improvement from last year’s low at 1.84% y/y.”

“Due to the open nature of its economy, the Riksbank tends to keep a close eye on the value of its exchange rate. For some time, market forecasts favouring SEK upside have been duly quashed by a dovish Riksbank.  We would argue that the recent dovish bias of the Riksbank has been aimed at preventing upside potential for the SEK vs. the EUR.  However, recent speculation that the ECB could be ready to signal a change in bias should allow the Riksbank some room for manoeuvre.  We expect that the Riksbank will indicate tomorrow that it will not extend its QE policy any further year and indicate that it is on course for raising the repo rate potentially in the latter half of 2018. We are forecasting EUR/SEK at 9.60 at year end.”

“There is little expectation in the market that the RBA will hike interest rates and time soon. That said, there is significant market interest in whether the RBA will use a more constructive tone at tomorrow’s policy meeting.  Feeding hopes for a more hawkish tone is the recent improvement in Australian labour data.  The unemployment rate unexpectedly dropped to 5.5% in May as full time employment rose by a stellar 52.1K during the month.”

“The RBA, however, could be finding itself walking a thin line.  Despite the better labour data and the recent upturn in iron ore prices, Australian wage and inflation data are very subdued and the RBA is likely to be keen to avoid any uptick in the value of AUD/USD.   The minutes of the RBA’s May policy meeting reiterate that “the depreciation of the exchange rate since 2013 had also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment”.  While the RBA is likely to acknowledge the improvement in the global economy at its meeting tomorrow, we would expect policy makers to stop short at offering more than a few morsels for AUD hawks.  On the assumption that the RBA leaves rates on hold for an extended period, we see scope for AUD/USD to edge lower towards the 0.74 area by year end.”