On Monday, the Riksbank said it would “instantly intervene” in the FX market in the event ongoing krona strength ends up imperiling Sweden’s inflation target.
“During 2015, the Riksbank has cut the repo rate to –0.35 per cent, adjusted the repo-rate path downwards and purchased large amounts of government bonds and also announced additional purchases during the first half of 2016,” the bank said, in a statement. “However, since the last monetary policy meeting in mid-December, the Swedish krona has appreciated against most other currencies [and] if this development were to continue, it could jeopardise the ongoing upturn in inflation.”
As a reminder, Sweden is caught between a rock and a hard place.
The Riksbank - like the SNB, the Norges Bank, and the Nationalbank - is effectively beholden to the ECB. When Draghi eases, Stefan Ingves must ease as well or risk “undesirable” currency appreciation. In other words, in the endless, beggar thy neighbor race to the Keynesian bottom, it’s ease or be eased upon (so to speak), as everyone fights to stay alive in the ongoing global currency wars.
Despite the Riksbank’s best efforts to appease an angry Paul Krugman who, prior to Ingves’ relent and subsequent plunge into NIRP-dom, accused the bank of being what he calls “sadomonetarists,” Sweden has struggled to push inflation higher and keep a lid on the krona in the face of Mario Draghi’s €1.1 trillion asset purchase program and attendant move to cut the depo rate into negative territory.
Meanwhile, negative rates have inflated a massive housing bubble that Ingves is powerless to rein in thanks to the fact that tightening not only risks pushing inflation to zero, but also incurring the wrath of the world’s Paul Krugmans who would, without a doubt, point the “sadomonetarist” finger on the way to claiming that the bank is about to make the same mistake it made in 2010 (when it hiked "prematurely).
Having run out of options on the inflation front, the bank has effectively given Ingves and his first deputy governor Kerstin af Jochnick the power to intervene immediately to drive the krona lower. Previously, a board meeting would have been necessary if the bank wanted to step into the market.
"The Riksbank could intervene at any time and wants to be unpredictable," Anna Breman, chief economist at Swedbank, told Bloomberg by phone. "Currency interventions are politically controversial [and] may also be very costly and create big losses on balance sheet," she added. "Riksbank FX intervention is a done deal if SEK appreciation trend continues, and is likely to be backed by further rate cuts," Stefan Mellin, an analyst at Danske Bank, wrote on Monday. "Expect Riksbank to respond if the late-Dec. trend continues at the same pace, taking EUR/SEK toward 9.00-9.10 and/or the KIX index much more than 2% below its 1Q forecast," he said.
Unfortunately for Ingves, hedge funds are adept at smelling blood in the FX waters (just as George Soros). As Bloomberg writes, the 2 and 20 crowd "may be gearing up to place bets against the Swedish central bank’s efforts to halt gains in the krona." Here's more:
“The market seems eager to challenge the Riksbank and there are rumors that many foreign hedge funds are long kronor and see a weakening of the krona after a possible intervention as a good buying opportunity,” he said. Exporters are also “structural krona buyers” and will probably exchange their foreign revenue after a dip, he said.
The Riksbank on Dec. 30 warned it was moving closer to intervening after the krona appreciated last month. On Monday, it sent out a statement that it had delegated the authority to Governor Stefan Ingves and his first deputy to “instantly” intervene in the market if necessary.
The Riksbank will probably need to contact primary dealer banks to warn them before it steps into currency markets, according to SEB, Swedbank and Danske Bank.
A currency intervention must now be “very close” and a tolerance level of between 9.00 and 9.10 “seems reasonable,” Javeus said. The bank will probably have to sell 2 billion kronor ($235 million) to 3 billion kronor to have any reasonable effect, he said.
In essence then, Ingves is now at war with the ECB and with hedge funds keen on testing the Riksbank's mettle.
With Sweden's QE program having already failed (see here and here), it now appears the Riksbank will soon be forced into a costly fight to keep the krona artificially suppressed. If Ingves loses the battle, deflation will be right around the corner (well, except in the housing market).
On the bright side, the inexorable influx of Mid-East migrants may end up causing Sweden to borrow more, thus creating more monetizable assets for the Riksbank's broken QE program.