The Riksbank is not helping the Swedish krona. EUR/SEK broke the April highs

EUR/SEK broke its April highs and it's not just a matter of risk sentiment. Opposition emerges from the Riksbank and lower-than-expected data on inflation they leave the crown without a solid foundation.

Softer data helps the Riksbank pigeons

Against the backdrop of continued weakness in the krona, the Riksbank's April meeting assumed that the bank would make both a 50 basis point rate hike and a decidedly hawkish statement to support the currency.

While the bank delivered the former, the overall message was more complex. The Riksbank interest rate projection showed that Sweden is likely at or very close to the peak of interest rates, and the unexpected opposition of two board members (Lieutenant Governor Anna Breman and VP Martin Floden) for a smaller increase added a dovish touch to what was otherwise significant increase in interest rates.

Later released meeting minutes revealed that this opposition was not per se ultra-dovish. Neither Breman nor Floden ruled out further hikes, but both saw signs of easing inflationary pressures and lower inflation expectations. Data published since the April meeting largely confirmed this view.

Both core and headline inflation fell below expectations last month, with core inflation (excluding energy) falling from 8,9% to 8,4%. Despite this, Floden noted that "there is still a long way to go before we get close to the inflation target."

Tough times ahead for the Swedish currency

The April meeting was a turning point for the crown. Signals in the interest rate projection, an unexpected board split and subsequent dovish data have made the SEK more vulnerable in the short term.

The hawkish message was probably the main tool of support SEK by the Riksbank, and this narrative is unlikely to be rebuilt in June, especially if inflation continues to move in the right direction. As Floden himself recently admitted, the Riksbank may want a stronger currency, but there is little they can do about it.

So it seems that the krona will remain very vulnerable to external adversities and even with a revival of risk sentiment, it may lag behind other pro-cyclical currencies. At the upcoming June 29 meeting, the Riksbank may hold off and delay the promised 25 bp rate hike until September. Much will depend on CPI data for May, which will be released on June 14.