SEK: Political risk? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that it may be a case of over-sensitivity, but the value of the SEK vs. the EUR dropped sharply this morning on the back of a newspaper report that Sweden’s Democrats party was calling for a referendum on the country’s EU membership.

Key Quotes

“Sweden’s Democrats won sufficient votes to enter parliament in 2010 and scored almost 13% of the vote in the last election in 2014.  Ahead of the next general election due in September, however, support for the far right party has strengthened.”

“The rise in the popularity of the far right has caused the governing Social Democrats to promise to tighten labour immigration if they are put back in power in September. However, if attempts by the mainstream parties to draw votes away from the far right stalls and the trend in favour of Sweden’s Democrats persists, it could be the second largest party in parliament after the election on September 9.  Even then, however, it could still find itself alienated in parliament. This means it may still be difficult for the Sweden Democrats to find sufficient support amongst lawmakers to call a referendum, never mind to persuade Swedes to vote to leave the EU.”

“Last June the Pew Research Centre published a paper showing an increase in popular support for the EU in many member states in the aftermath of the UK’s decision to leave.”

“This shows that 53% of Swedes are in favour of EU membership up from 49% in 2016, while the proportion of people who would vote to leave dropped to 18% from 23%.”

“Although it seem premature for the SEK to be rocked by the fears of a wave of anti-EU sentiment, the rise of the far right in Sweden and concerns about immigration policies echo trends seen elsewhere in the region. If politicians fail to put in place appropriate polices, it may be only a matter of time before populism gains strength.  This is a potential threat not just for the SEK but for the EUR also.”

“While the market may have overreacted to today’s news regarding a potential EU referendum in Sweden, the climb in the value of EUR/SEK in recent sessions suggests that the recent strengthening in the value of the SEK may have shaken out many short SEK positions.”

“Given the risk of a Riksbank rate hike ahead of the ECB, we would view pullbacks to EUR/SEK10.40 as a selling opportunity and look for a move towards 10.10 on a 3 mth view.  That said, we concede that election uncertainty could increase volatility.”