SEK: Set for gradual appreciation - Natixis

Nordine Naam, Research Analyst at Natixis, notes that since November, the Swedish krona has appreciated sharply against the euro, the EUR/SEK declining from 9.96 to set a low at 9.41 at the start of February.

Key Quotes

“This has taken place when the euro experienced a bout of weakness in reaction to the announcement by the European Central Bank that it would be pressing ahead with its Asset Purchase Programme and to the surge in European political risks, but the main drivers have been the improvement in Swedish economic growth and inflation. After tottering on the edge of deflation, consumer prices have picked up since 2016.”

“The Swedish krona even appreciated in the wake of Riksbank’s December meeting, despite the central bank maintaining a very dovish stance, announcing the extension of its asset purchase programme during the first half of 2017 (for a total of SEK245bn), to keep pace with the European Central Bank’s own programme, and maintaining a downward bias for its forward guidance.”

“The fact is that announcements by Riksbank have failed to dispel expectations of an earlier-than-anticipated tightening of monetary policy given the rebound in inflation to near the central bank’s official 2% target. As a result, the spread between Eurozone and Swedish 2-year interest rates (see left-hand chart below) has tightened. The market is also playing prospects that Riksbank will exit QE sooner (June 2017) than the European Central Bank (end-2017).”

“Yet, when it met on 15 February, Riksbank maintained a rather dovish stance once again, when the market expected it to turn hawkish now that inflation is back near the official 2% target.”

“In sum, Riksbank remains very cautious on inflation. After rising for four consecutive months on the back of crude oil prices, headline inflation slowed to 1.4% in January (from 1.7% in December). Without energy, inflation pulled back to 1.6% in January (from 1.9% in December), expectations being that it will hold at this level until the end of the year, possible dip lower if the Swedisk krona appreciates sharply given the impact this would have on import prices. For these reasons, we do not expect a sharp appreciation of the krona this year, as the central bank will be vigilant, ready to intervene in the foreign exchange market if necessary. We see the EUR/SEK at 9.30 at the year-end, compared with which the 12-month forward currently trades at 9.48.”

“In coming months, there is even the risk that the krona will be buffeted to quite some extent by the rise in European political risks (uncertain outcome of elections in the Netherlands on 15 March and France on 8 May). A possible downturn in European economic activity because of these political uncertainties would seriously affect the Swedish economy, as exports to the Eurozone account for almost 50% of total exports. The krona can also be expected to be penalised by uncertainties surrounding Brexit given Sweden’s significant exposure to the British economy. In coming weeks, the EUR//SEK could recover temporarily towards 9.60 in reaction to the latest inflation data, which we would see as an opportunity to short the EUR/SEK.”