COMMENT-One Riksbank related risk to Sweden's crown

The Riksbank is widely expected to leave Sweden's interest rate on hold at 4% on Thursday, which is unlikely to move the crown, but there is one small risk that would prompt a reaction in the currency.

Falling inflation should remove any rhetoric about the need for future rate hikes from the statement, especially given rising unemployment and a stagnating economy amid the dovish ECB outlook. However, the central bank will refrain from sounding overly dovish in order to prevent the SEK from weakening and is therefore likely to push against the market's pricing (currently 70%) for a rate cut in March. It is also likely to increase the pace of quantitative tightening from SEK 5-billion to SEK 6-billion per month, according to some analysts.

Low EUR/SEK FX option implied volatility reflects the recent lack of FX realised volatility, even for those options expiring just after the Riksbank, which would concur with the expected lack of related currency reaction.

However, with the Riksbank's currency hedging program now almost complete, there's a risk, albeit very small, that it might hint at the need for further SEK purchases, which would ultimately boost the crown.