EUR/SEK: Current strength of the Krona unlikely to last – Commerzbank

The Swedish Krona has performed exceptionally well over the past week and a half. Michael Pfister, FX Analyst at Commerzbank, analyzes SEK outlook.

What is the source of the current strength?

What is the driver of the Krona's current strength? The main reason is likely to be the Riksbank's recent decision to sell almost 1/4 of its foreign exchange reserves in US Dollars and Euros and at the same time to enter into FX swaps in order to keep foreign exchange reserves constant. The reason given for the move is that the Riksbank expects the SEK to appreciate in the near future, which would lead to losses in the foreign exchange portfolio.

Nevertheless, I remain sceptical. Interventions in the foreign exchange market are only successful in the long term if they are also underpinned by the appropriate monetary policy. And in recent months, the impression had become entrenched that the Riksbank was merely lagging behind the inflation trend. In view of core inflation of more than 7% and further interest rate hikes of only 10 bps expected by the Riksbank, this is certainly not entirely unjustified. Verbal interventions can't change that much either. At the moment, this makes me doubt that the current strength of the Swedish Krona will last.