Behind us is the decision of the central bank of Sweden - Riksbank, which we mentioned in yesterday's comment. In line with investors' expectations from the FX options market, the volatility on SEK increased significantly and the krona strengthened after Riksbank's statement. The ECB meeting and the next week's Fed are ahead of us.
Behind us is the decision of the central bank of Sweden - Riksbank, which we mentioned in yesterday's comment. In line with investors' expectations from the FX options market, the volatility on SEK increased significantly and the krona strengthened after Riksbank's statement. The ECB meeting and the next week's Fed are ahead of us.
The Swedish krona has strengthened against the euro and the dollar by about 0.8 percent right after Riksbank's decision that the main interest rate will still be -0.25 percent. However, according to the statement, the interest rate may increase in December this year or at the beginning of next year. However, any further increases will be made at a slower pace than in the previous forecast due to deterioration of sentiment and low interest rates abroad.
Investors, however, read the statement as more hawkish, as perhaps some of them expected that Riksbank would abandon "forward guidance" and would no longer mention a possible rate hike in two months. It has been added that the economy has entered a calmer phase and inflation is close to the 2 percent target.
For the EUR/SEK exchange rate, but also for other currency pairs with euro, an important event on Thursday 24 October will be the decision of the European Central Bank and a press conference. This will be the last meeting with Mario Draghi, as the head of this institution, who held this position for 8 years. For this reason, it seems that no key decisions will be made, as these were taken at the previous meeting.
Looking at investors' expectations, we can see a decline in demand for EUR/USD call options, which may reflect concerns that Mario Draghi will retain dovish tone at his last press conference as ECB president. The market expects the Governing Council will not make any changes and Draghi should intensify appeals to regional authorities for fiscal support to complement monetary policy.
The expected volatility for weekly options is rising noticeably, as they already cover the Fed's decision that will be made on October 30. What's more, buyers of call options dominate in this tenor, i.e. investors who expect an increase in the EUR/USD exchange rate. In turn, on the interest rate market we have 93.5 percent chances that the Fed may cut the federal funds rate at the end of October, which may have an impact on the US dollar and its possible weakness.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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