RBA Delivers, Is The Riksbank Next?

Includes: FXS
by: Marc Chandler

The Reserve Bank of Australia delivered a 25 bp rate cut earlier today. While the ECB, BOE and BOJ meet later this week, expectations are low for additional action. Sweden's Riksbank meets on October 25, and it could be the next central bank to cut rates.

The Riksbank cut the repo rate 25 bp in early September to 1.25%. Recent economic data in Sweden has been exceptionally poor. Retail sales were expected to have risen in August, but instead fell 0.4% and were down two of the past three months through August. Swedbank's PMI index fell to 44.7 in September, rather than increase to 46.4 as the consensus expected, from 45.1 in August. This is the lowest reading in three years.

The central bank's survey, out earlier today, showed a deterioration in sentiment among businesses, with heightened concern about the weakness of orders. Sweden exports roughly 50% of its GDP, of which more than two-thirds goes to Europe. With Europe in a recessionary state, Swedish businesses are being squeezed.

Low inflation and a relatively strong currency give the Riksbank room to maneuver. The latest inflation readings are from August, and they showed the key core rate at 0.9% on a year-over-year basis, just above the 0.7% headline rate. Even with the Q3 bounce in the euro, the krona (NYSEARCA:FXS) is trading nearly 8% above its May low on a trade-weighted basis.

The main argument against the Riksbank easing later this month is that back-to-back cuts are particularly aggressive. The market is mixed. Our forward traders note that a greater chance of a cut appears priced into the FRAs and less in the forwards. There is little reason not to prepare for stronger global economic headwinds in the months ahead.

We lean in favor of a cut, not just because of the poor data, but also to cushion the slowdown and higher unemployment that seems baked into next year's cake.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.