Will The Riksbank Deliver?

May 08, 2024

Elias Haddad

Will The Riksbank Deliver?

Sweden’s Riksbank is expected to cut rates today.

USD continues to recover despite the lack of policy-relevant economic data releases.

BOJ and MOF at odds over impact of weak yen on inflation.

Dive into our latest FX Quarterly report for our longer-term USD outlook. We also introduce our adjusted Purchasing Power Parity (PPP) model, discuss the dollar's reserve currency status, and talk about China's path to recovery and its impact on Emerging Markets.

USD is firmer against all major currencies in line with widening US bond yield spreads relative to other major economies. Yesterday, Minneapolis Fed President Neel Kashkari (non-voter) delivered some hawkish comments. According to Kashkari “the most likely scenario is we sit here [with respect to the funds rate] for an extended period of time” adding the bar for raising rates is quite high, but he wouldn’t rule it out. Kashkari also questioned how restrictive monetary policy really is considering inflation in the most recent quarter is moving sideways and the housing market is resilient.

There are no policy-relevant US economic data releases today, just a few Fed speakers. Fed Vice Chair Philip Jefferson takes part in a moderated discussion on careers in economics (4:00pm London). Boston Fed President Susan Collins (non-voter) participates in a fireside chat (4:45pm London). Fed Governor Lisa Cook discusses the Fed’s latest semi-annual Financial Stability Report (6:30pm London).

SEK is under downside pressure versus USD and EUR ahead of today’s Riksbank policy rate decision (8:30am London). The decision is live as the Riksbank indicated that the policy rate can be cut in May or June. The money market sees 70% odds of a rate cut today, while a June cut is fully priced in. Similarly, nearly two thirds of analysts polled by Bloomberg have penciled-in a rate cut. Fresh forward looking policy guidance is unlikely before the updated Monetary Policy Report is published in June.

USD/JPY edged back up above 155.00 after testing lows near 152.00 last week. Bank of Japan (BOJ) Governor Kazuo Ueda warned there is a risk the weak yen could affect underlying inflation but added that so far that’s not the case. Indeed, underlying inflation in Japan is in a firm downtrend with core CPI (ex-fresh food & energy) dropping to a 16-month low of 2.9% y/y in March. As such, the BOJ tightening cycle will likely remain modest and a drag on JPY.

Meanwhile, Japan’s Finance Minister Shunichi Suzuki noted his strong concerns over the weak yen impact on prices and reiterated readiness to “take actions against excessive FX moves”. The USD/JPY price action suggests the Ministry of Finance (MOF) gave the green light for intervention on April 29 and May 1. Japan’s government will disclose any intervention at end of May.

National Bank of Hungary releases the minutes of the April policy meeting (1:00pm London). At the April 23 meeting, the bank cut rates 50bps to 7.75% after cutting rates 75bps in March and 100bps in February. Deputy Governor Virag said a “careful and patient approach” was warranted. The bank sees the policy rate between 6.5-7.0% by mid-year and would get there if it cuts 50bps at the May and June meetings. The market is pricing in 125bps of easing over the next 12 months.

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