Economic developments since July suggest that the Riksbank will have to lower its rate path (see Reading the Markets Sweden, 30 August). As a result, the Riksbank's 'every second meeting rule' (humorous twinkle, see Table 1) would still apply. Such a decision would not come as a big surprise given current pricing (-9bp 2019 and -8bp 2020). However, we find it hard to believe that giving up on planned rate hikes will be received as a hawkish move. Hence, we think EUR/SEK will move higher.
First, a Riksbank day is typically a major market mover. Currently the options market is pricing in a six-figure move for tomorrow. This compares to the average intra-day high/low spread in EUR/SEK that has been 11 figures counting every meeting since 2016 (absolute numbers, see Chart 1). When the decision was to lower the rate path, the high/low spread was15 figures and when it was left unchanged nine figures.
EUR/SEK Data Points
When the path was lowered the average rise (open/close) in EUR/SEK was six figures and when it was left unchanged it was two figures (see Chart 2). Hence, a dovish move has had a relatively bigger impact on the cross. While we look for EUR/SEK to move higher tomorrow, given the already dovish market expectations this time we think risk-reward may favour the downside.