EUR/SEK leaves behind the reflation story to raise toward 10.50 – Danske Bank

Analysts at Danske Bank revised higher their forecast for the Swedish krona versus the euro. They now see the EUR/SEK pair moving to 10.50 on a one-to-three month period and to 10.30 on a six-to-twelve months horizon.

Key quotes

“After the Q2 blowout, Q3 looks set to post a decent rebound here and almost everywhere. We believe this part of the reflation narrative has probably passed its most dynamic period though. Going forward, we expect the recovery to lose momentum, which suggests that the best part of the SEK impetus is behind us. That said, as long as the recovery goes the right way, the SEK should still have some friends out there.”

“The repo rate as a means to support the economy. Inflation is running significantly below target. While 5Y inflation expectations are falling, the Riksbank is satisfied with a level of around 1.7-1.8%. The Riksbank is keeping the door open for a return to negative rates if the credibility of the 2% target is threatened; this, in our view, limits the downside potential in EUR/SEK. Board members have downplayed the previous SEK appreciation.”

“Question marks over the reflation narrative, signs of a recovery slowdown, not least in Europe, disappointing inflation prints and a Fed that failed to get out the big guns have weighed on the SEK, in particular vs the USD, and taken EUR/SEK a leg higher in its ascending trend since 21 July. We believe part of the SEK sell-off seems overdone though.”

“While the Riksbank is normally a key driver, it is less so now, while global factors dominate. Catalysts for a weaker SEK could be further headwinds for reflation optimism or if the Riksbank, contrary to our base scenario, goes negative again. On the other hand, a strong reflationary comeback could send EUR/SEK back toward 2020 lows, where it would find itself close to medium-term fair value. On balance, we raise our trajectory to 10.50 (10.30) in one-to-three months and 10.30 (10.10) in six-to-twelve months.”


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