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Market Analysis

Fundamental Analysis: Krona Retreats on Lower Inflation

March 12, 2019
BY Michael Stark

The Swedish krona made some losses with volatility this morning in the aftermath of weaker data on inflation. OMX Stockholm 30 futures have also posted a loss today.

The krona weakened to over 9.40 kr to the dollar. EURSEK also rose to around 10.58 kr, although the pound has been exceptionally volatile today with an overall large loss to 12.22 kr.

Swedish data mixed but inflation lower

This morning’s data from Sweden on monthly and yearly inflation was the main catalyst for today’s losses by SEK. Monthly inflation at 0.7% is lower than the expectation but significantly higher than January’s negative 1%. Meanwhile the yearly figure is the same as last month but it missed the expectation of 2%.

One of the main reasons for disappointing inflation not causing sharp losses again like last month is Thursday’s meeting at the European Central Bank. The ECB’s cutting of growth forecasts was a very negative factor for SEK as well as NOK and DKK because of the high value of Scandinavian exports to the rest of the EU. However, the reaction to Thursday’s news has meant that further losses for an already oversold krona are relatively small so far today.

Traders of SEK also considered some fairly good data from last week, though. Service PMI increased above expectations, and Q4’s current account surplus gained to 39.6 billion kronor. SEK also ended last week on a positive note with a significant gain in household consumption, 0.7% against the previous negative 0.4%.

Shares have on the whole been a downward driver for the krona since last week. Today’s session in particular saw futures on the OMX index lose about 2.6%. This retreat from recent highs is mainly a result of energy and industrial shares’ decline today. These sectors have on the whole reversed most of yesterday’s gains.

EU data and Brexit in view this week

The only significant data from Sweden this week is the figure for the rate of unemployment in February. Current expectations point to a very slight increase to 6.6% on Thursday at 08.30 GMT.

Data and news from the EU and the UK are likely to be the biggest drivers for most SEK pairs in the next few days. Events in London tonight might provide a clearer direction for GBPSEK; however, volatility is set to remain very high.

Eurozone CPI on Friday is a crucial release for the krona as well as the euro. A decline against expectations, which might support the ECB’s dovish outlook, would have the potential to drive more losses for SEK.

Ultimately, the importance of these and other releases remains how they affect the Riksbank’s monetary policy. Lower inflation for two months running would suggest that rates might be held for a while longer in negative territory, but analysts cannot yet rule out completely a hike in Q3 or Q4 2019.

Krona moving down, but watch out for volatility

Fundamentals overall suggest a continuing downward movement for SEK over the next few days. However, traders must not ignore the latest news of Brexit because this can increase volatility even further.

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