SEK: The best European currency – SocGen

According to Olivier Korber, Research Analyst at Societe Generale, among the European currencies, Scandinavian currencies should be the most resistant to the vigour of the euro, with the Swedish krona likely be the best performer.

Key Quotes

“We especially like GBP/SEK shorts based on the growth divergence between the UK and Sweden.”

Slightly weaker growth but higher exports. While the impressive economic upswing of the first half is losing some of its momentum (2Q GDP downgraded to 1.3% q/q from 1.7% q/q), growth remains strong. Domestic demand has been revised lower (consumer spending and investment), but exports have been significantly revised up. This is essential for supporting the currency via persistent incoming flows.”

Rising inflation paves the way for normalisation. The statement of the September Riksbank meeting reckons that the employment rate is at a historically high level whereas inflation in recent months has been higher than expected. The central bank is becoming more comfortable with inflation prospects, as the CPIF printed above the 2% target this summer for the first time since 2010. It is becoming obvious that the time for Riksbank policy normalisation is drawing closer. The board has been even less dovish about the currency since July, implicitly tolerating some currency strength (we forecast a mild increase against the EUR), in stating that it is important that the SEK “does not appreciate too quickly”.”

Riksbank forward guidance ahead of the ECB. The forward guidance of the central bank says that QE will continue during the rest of the year, mimicking that of the ECB for its own QE (even including the possibility of more easing if disinflation calls for it). On the rates side, no hike from current negative rates at -0.50% will happen before mid-2018. This contrasts with the rates guidance of the ECB, which still states that the key rate will remain at its level “well past the horizon of the net asset purchases”. Diverging monetary policy prospects should in any event maintain the EUR/SEK under pressure.”

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