Sweden's Riksbank Leaves Rates Unchanged at 4% but Signals Possibility of Future Cuts

Traders' Opinions

Economic

Summary:

Implementing a reduction in May would entail taking action ahead of the ECB and Fed.

The Riksbank sets the stage for potential monetary easing in May, presenting Sweden’s recession-hit economy with the promise of immediate relief.

Despite maintaining the benchmark interest rate at 4%, in line with expectations, policymakers under the leadership of Governor Erik Thedeen intensified indications of a forthcoming cut in the coming quarter. They also outlined a trajectory toward three possible rate reductions within the year. Following the announcement, the krona experienced a depreciation.

Source: Statistics Sweden

At a press conference, Thedeen stated that there is approximately a 50% chance of action in May.

This guidance implies that policymakers are sufficiently optimistic about recent consumer price data to perceive success in a two-year struggle against inflation, which resulted in significantly elevated borrowing expenses for an economy now grappling with the aftermath.

Unless other counterparts swiftly change direction before that time, a reduction declared on May 8th could position Sweden as the second, following Switzerland, among the top ten most traded currency jurisdictions globally to commence loosening monetary constraints.

Investor forecasts currently indicate that both the Federal Reserve and the European Central Bank are likely to hold off until at least June. In contrast, the Riksbank's decision in June is scheduled for the 27th, considerably later than those of its counterparts.

Traders in overnight swaps are now pricing in an 86% likelihood of a Riksbank rate reduction at the May meeting, up from the 67% figure observed on Tuesday.

Despite mentioning in February the possibility of lowering the rate in the first half of 2024, the Swedish central bank did not offer much additional clarity to investors and economists who were divided on when to expect that initial move to 3.75%.

Source: The Riksbank

In the past month, the Swedish krona, ranking as the second weakest among major currencies in the G-10 space, managed to recover its losses. After initially dropping as much as 0.3% against the euro, it stabilized, trading nearly unchanged at 11.4750 as of 11:19 a.m. in Stockholm.

The resurgence of a fragile currency has become a notable risk in recent weeks. Should this depreciation continue, there's a possibility of retailers increasing prices on imported goods.

The Riksbank's outlook now indicates a shorter recession for Sweden, with a projected expansion of 0.3% for the full year, compared to the previously estimated 0.2% contraction.

Although Sweden's substantial export sector has mitigated some of the impact, rising unemployment and struggling rate-sensitive sectors are evident through subdued consumption and a significant decline in housing investments.

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Warren Takunda

Central Bank

The Bank of England said on Wednesday it was taking a deeper look at risks from the opaque private equity sector, and why valuations of Britain's main banks are "subdued" compared with international peers.

The BoE's Financial Policy Committee said finance for riskier corporates could be particularly vulnerable to a significant deterioration in investor risk sentiment.

"The private equity sector, which is closely related to private credit and leveraged lending, plays an important role in channelling finance to the UK real economy," the BoE's Financial Policy Committee said in a record of its March quarterly meeting.

It was difficult to assess asset valuations and leverage in the sector, thus making it harder to assess risks to wider financial stability, the FPC said.

"The FPC will publish a further assessment of these risks in its June 2024 Financial Stability Report," it added.

Britain's banking system is "well capitalised" and has "strong liquidity", giving it the capacity to keep on lending even if econonomic and financial conditions were to be substantially worse than expected.

In the fourth quarter of last year, the major banks, such as NatWest, Lloyds, HSBC and Barclays had an overall core equity capital buffer of 14.7%, with an aggregate 3-month moving average liquidity coverage ratio of 147%, the BoE said.

However, the Bank will undertake a "desk based" stress test of lenders this year to check on their resilience to shocks.

The FPC said it would maintain the countercyclical capital buffer - a rainy day reserve - for major UK banks at its "neutral" level of 2%.

Overall profitability of major banks is expected to remain robust but indicators of market value of their future profitability, such as average tangible price to book ratios, remain subdued, the FPC said.

The FPC will publish a futher analysis of the ratios in June, echoing wider concerns in Europe at how valuations of banks lag those of U.S. rivals.

The Bank also flagged that financial firms and market infrastructure, such as payments, clearing and settlement system face further scrutiny of their ability to bounce back from cyber attacks, IT glitches and other disruptions with set deadlines.

It will start a cyber stress test to check on resilience in the spring, with the findings published in the first half of 2025.

"The FPC noted, however that resilience of individual firms alone might not be sufficient to ensure system-wide resilience," the committee said.

Currently, core payment systems have to show they can recover from glitches, but the FPC said it would "consider whether to set impact tolerances for additional vital services beyond payments" to plug any gaps in resilience that it finds.

Source: Reuters

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Ukadike Micheal

Economic

Commodity

As the recent rally in prices encounters a lack of buying interest in China, aluminum, along with other industrial metals, experienced a decline. The LMEX Metals Index, tracking six main base metals, reached an eight-month high earlier in March, propelled by factors such as supply risks and optimism about global manufacturing.

However, the anticipated increase in spring activity in China, typically boosting consumption, has not fully materialized. Recent price gains have deterred buyers, leading to widening spot aluminum discounts and an increase in cargo dumping, as noted by Jinrui Futures Co.

Despite this, there was some positive news in China's latest industrial profits data, showing gains that began in August. However, analysts caution that much of this strength may be attributed to the base effect of comparing to a weak 2023.

Amidst these developments, aluminum prices fell by 1.0% to $2,280.50 a ton on the London Metal Exchange, with zinc leading all metals lower with a 1.1% decline.

The subdued demand from China underscores the delicate balance between supply and demand dynamics in the global metals market. While optimism about an improving manufacturing outlook and supply risks initially fueled the rally in metal prices, the reality of sluggish demand in key consuming regions like China has tempered market sentiment.

From a technical standpoint, the widening spot aluminum discounts and increased cargo dumping indicate a mismatch between supply and demand forces. This divergence could lead to further price adjustments as market participants reassess their positions and adjust to changing market conditions.

Looking ahead, market participants will closely monitor developments in China's industrial activity and demand trends for further insights into the trajectory of metal prices. Additionally, factors such as global economic recovery prospects, supply disruptions, and geopolitical tensions will continue to influence metal prices in the coming months.

The recent decline in aluminum and other industrial metals underscores the challenges facing the market as it navigates through a complex landscape of supply and demand dynamics. While initial optimism fueled a rally in prices, the reality of sluggish demand in key consuming regions like China highlights the need for caution. As market participants adapt to evolving market conditions, staying informed and agile will be essential for navigating the uncertainties ahead in the global metals market.

Source: Bloomberg

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Devin

Central Bank

Economic

Forex

At its March meeting, the BoE left interest rates unchanged at 5.25% and maintained its outlook for inflation and growth. But two policymakers who had previously voted for a rate hike switched to a hold - lending the central bank's decision a more cut-friendly bent than it otherwise would have had.

One major support for the pound over the last six months has been the expectation that the BoE will be slower to cut rates than either the Fed or the ECB, meaning UK lending rates have been higher than those elsewhere.

A week on from the BoE's last meeting and the futures market has flipped. Traders are now placing a small, but nonetheless noticeable, bet the BoE could be the first of the three to cut.

There is a 20% chance the central bank could deliver a quarter-point cut at its next meeting on May 9, while the chance of a cut from the ECB at its upcoming meeting on April 11 lies at around 5%, and at roughly 13% for the Fed to move on May 1.

But investors haven't exactly deserted the pound. The most recent weekly data from the U.S. regulator shows speculators trimmed their bullish sterling position to $4.23 billion from $5.623 billion - the largest since records began in 2012.

The British economy has muddled its way through over two years of almost non-stop rate rises and soaring energy prices with little more than a short, mild recession.

A number of macro metrics have recently improved. Even inflation has declined enough to bring the UK more in line with the rest of the G10 - a year ago, Britain was a clear outlier, with price pressures well above the average for this group.

"Sterling's external vulnerabilities screen much lower now, helped in no small part by the fall in energy prices," Deutsche Bank said in a recent note that pointed to the narrowing in the current account deficit as another sterling-positive example.

Sterling might also have time on its side, given that it is fast approaching what has traditionally been its best month of the year for performance.

April is a sweet spot for the pound, according to strategists at Bank of America, who say if history is any guide, the pound could hit $1.30 next month, up from around $1.266 right now.

On average over the last 50 years, the pound has gained 0.7% against the dollar in April, making this by far its strongest month for performance, compared with August, its weakest month, when it has lost an average of 0.7%.

"Seasonality does play a part and partly that's to do with the tax year-end and people filling up their ISAs (individual savings accounts), so there's more investment, UK-wise," XTB research director Kathleen Brooks said.

"Whilst the yield differential could be eroded, and that's definitely what's driven sterling in the last year, it could be in a way that is growth-positive, which could support the pound," she said.

Source: Reuters

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Warren Takunda

Central Bank

Economic

The Japanese Yen has staged a sharp recovery on news that Japan's Ministry of Finance may take "decisive steps" to shore up the currency's value.

Japan's finance minister, Shunichi Suzuki, said on Wednesday that authorities could take "decisive steps" against yen weakness after the currency fell to a 34-year low against the dollar. Analysts point out that this is language he hasn't used since 2022 when Japan last intervened in the market.

After Suzuki's comments, authorities announced that the Bank of Japan, the Finance Ministry and Japan's Financial Services Agency would hold discussions to "discuss" international financial market developments.

Markets took this as a sign authorities were finally readying to intervene in the markets and prop up the Yen.

The Dollar-Yen exchange rate fell a third of a per cent to 151.35 on the news, having hit its strongest level since 1990 earlier in the day. Yen Recovers on "Decisive" FX Intervention Threat_1

Yen Recovers on "Decisive" FX Intervention Threat_1

"Now we are watching market moves with a high sense of urgency," said Suzuki. "If there's excessive moves, we will take decisive steps and not rule out any options."

This is the second time this week Suzuki has issued verbal intervention, having said Tuesday that "rapid currency moves are undesirable" and that Tokyo will not rule out any steps to support the Yen.

Goldman Sachs had lowered its Japanese Yen forecasts, judging the recent interest rate hike at the Bank of Japan was not enough to alter the Yen's direction.

"The Bank of Japan hiked rates for the first time in 17 years, and for just the fourth time since the introduction of the zero interest rate policy in 1999. While this marks another giant leap for the BoJ, we think it is a small step for the Yen," says Goldman Sachs in a weekly currency research note detailing the forecast changes.

Regarding the threat of FX intervention, Goldman Sachs expects Japan policy to continue to be sensitive to the exchange rate, but it remains the case that the benign macro risk environment should weigh on the Yen over time.

"Fundamentally... we do not think the BoJ’s actions will prompt significant repatriation from Japan-based investors—that would need to come from a change in the returns available abroad," explains Goldman Sachs.

Goldman Sachs raises its forecast path for Dollar-Yen higher again to 155, 150, and 145 in three, six and 12 months (vs 145, 142 and 140 previously).

Source: Poundsterlinglive

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Ukadike Micheal

Economic

Forex

The Riksbank's recent announcement regarding potential monetary easing has garnered attention amidst ongoing economic uncertainties. While maintaining the benchmark interest rate at 4%, policymakers have hinted at a forthcoming shift in monetary policy, suggesting the possibility of rate cuts in the near future. This decision comes against the backdrop of speculation over the timing of such easing measures, reflecting the central bank's responsiveness to evolving economic conditions.

The central bank's statement, released on Wednesday, underscored the importance of further confirmation that inflation will stabilize near the target. This cautious approach reflects policymakers' desire to ensure sustained economic stability while navigating the complexities of monetary policy adjustments. Should inflation prospects remain favorable, the Riksbank indicated that a policy rate cut could be implemented as early as May or June. This forward guidance provides markets with insight into the central bank's thinking and potential policy trajectory, influencing investor sentiment and market dynamics.

A potential rate cut in May would position Sweden as one of the few major currency jurisdictions to ease monetary policy, potentially diverging from the trajectories of central banks in other advanced economies. Investor expectations currently suggest that the Federal Reserve and the European Central Bank may delay similar actions until at least June, highlighting the Riksbank's proactive stance in addressing economic challenges. The timing of the central bank's decision in June will be significant, as it will occur after those of its counterparts, potentially shaping global market trends and investor behavior.

Despite earlier indications in February about a potential rate cut in the first half of 2024, the central bank did not provide much clarity on the timing of the initial move to 3.75%. This lack of specificity underscores the inherent uncertainties surrounding monetary policy decisions and the need for policymakers to balance various economic indicators and risks. Lingering doubts over consumer prices remain a key consideration, requiring careful monitoring and assessment before any decisive action can be taken.

One significant risk contributing to the central bank's cautious approach is the weakening krona, which has reached its lowest level against the euro since November. Continued depreciation of the currency could pose challenges, including potential price hikes on imported goods, which may exacerbate inflationary pressures. This underscores the importance of exchange rate dynamics in shaping monetary policy decisions and economic outcomes.

Overall, a reduction in borrowing costs would alleviate pressure on Sweden's shrinking economy, which has experienced three consecutive quarters of contraction. While the country's export industry has mitigated some of the impact, rising unemployment and struggling rate-sensitive sectors, reflected in subdued consumption and declining housing investments, highlight the need for supportive monetary measures. By providing the prospect of monetary easing, the Riksbank aims to support economic recovery efforts and mitigate the adverse effects of the ongoing recession.

The Riksbank's indication of potential rate cuts reflects a proactive stance aimed at supporting Sweden's economic recovery amidst challenging conditions. As policymakers navigate uncertainties and assess various economic indicators, their decisions will have significant implications for domestic economic prospects and global market dynamics. By providing forward guidance and signaling potential policy adjustments, the central bank seeks to enhance transparency and manage market expectations effectively.

Source: Bloomberg

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Samantha Luan

Economic

Several signals have stirred that speculation. While the yuan has declined roughly 2 per cent this year against the dollar, it has become relatively less competitive as Japan's yen and currencies of other neighbours South Korea, Thailand and Taiwan drop more sharply.

The People's Bank of China (PBOC) also appears to have loosened its grip on the yuan, allowing it to fall to the weak side of the 7.2-per-dollar level that state-owned banks had staunchly defended in the past, though it has continued to lend some support through stronger-than-expected settings of the daily mid-point for the currency.

Last Friday, traders took the absence of state banks in the market to push the yuan to 7.23 to a dollar initially, and even though state banks eventually stepped in the yuan saw its biggest daily drop in nearly 3 months.

Analysts at National Australia Bank (NAB) said it was "more than coincidental" that the PBOC’s defence of the yuan had relaxed in the same week the Bank of Japan abandoned its negative rates and yield-curve control policy.

Though the BOJ's policy shift last week was momentous, Japanese yields are still barely positive and the yen has ironically weakened further. It is down 7 per cent this year against the dollar this year alone, and at a 30-year low against the yuan.

"Concerns at loss of export competitiveness vis-à-vis Japan too have motivated Friday's decision to lift the 7.20 cap," NAB analysts Ray Attrill and Rodrigo Catril wrote this week.

The yuan's trade-weighted index is up 2 per cent so far this year as currencies of China's trading partners have weakened, gnawing away at the country's export competitiveness and hobbling its uneven economy recovery.

The index is at 99.30, far above the 92-98 band that analysts think the PBOC is comfortable with.

The PBOC did not respond to a Reuters request for comments.

FLOWS AND OTHER FORCES

Even though China's exports seem to have rebounded early this year, the manufacturing sector is struggling, and weak export orders suggest the sector needs more support. A weak yuan would help lift export earnings.

Analysts at Oxford Economics expect the monetary policy divergence between the US Federal Reserve and PBOC to keep the yuan weak in the first half of 2024, but wrote that "any depreciation ahead is likely to be highly controlled", and projected the yuan will not fall beyond 7.34, a level last seen in September.

UBS strategists Rohit Arora and Teck Quan Koh also reckon there could be a shift in Beijing's policy priorities, similar to the yuan's decline in the second half of 2022, when it gradually fell nearly 9 per cent to as far as 7.328.

"Put another way, we don’t expect authorities to allow yuan to be fully market-driven, but continue with a managed and orderly adjustment process," they said.

Barring another big boost for the US dollar, they expect the yuan will head slowly for 7.4.

Indeed, the steady outflows from frail mainland stock markets and other speculative bets might require the PBOC to dampen volatility, as it does normally through state banks.

One such pressure point is the yuan's increasing use in 'carry trades' in which investors borrow in a currency with low interest rates and invest the proceeds in a higher-yielding currency.

Returns on yuan-funded carry trades are lower than that on yen-funded ones, where an easy 5 per cent annualised gain can be made on 3-month swaps. But traders expect the yen to be more volatile under the BOJ's new policy regime, while the yuan has traditionally been sheltered.

"From where I sit, the only thing preventing the yuan from meaningfully weakening is active policy guidance from PBOC," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments.

Goh has been using the offshore yuan as a funding currency since the beginning of the year, shorting the currency and investing in high-yielding assets such as Indian rupee bonds.

"If you’ve held a long dollar-CNH position since the beginning of the year, you would have already earned more than 400 pips of carry and capital gains," Goh said.