We have now updated our thoughts on SEK for the 2nd half of the year. These are below:
The lack of political fear in the price of the euro has led the SEK weaker over the past few months without the Riksbank having to do anything on interest rates apart from verbally ensuring currency markets don’t get happy feet and price in rate hikes too quickly. Our expectation is that nothing will happen to interest rates in Sweden this year and while expectations can only go in one direction, the SEK will remain unloved. A hold in EURSEK at around 9.60-9.70 seems about right for now but a push to 9.30 as those rate hikes are eventually priced in is very much a possibility.
These predictions outline the high, low, median and mean expectations for the above currency pair as found by a Bloomberg survey of banks and brokers and should only be used for illustrative purposes. Source: Bloomberg
Conclusion: Rate chatter will still come from the Riksbank but its effect on the currency may be slow.
The krone has ended the year in a volatile fashion with moves from the European Central Bank at its December meeting throwing the Riksbank’s policy agenda for 2017 into doubt. In October, the krona was hit hard following the central bank’s decision to hold off on cutting rates although giving a definitive signal that further rate cuts could be coming in a bid to create inflation in the country.
The main rate in Sweden is currently 0.5% below zero and we had thought that ECB decisions to hold off additional cuts would allow the Swedes more breathing room. The decision from Frankfurt to further extend the life of its quantitative easing plan however, thereby allowing for further euro weakness into a year wherein traders will be sharpening their knives for single currency depreciation, will mean that the Riksbank will have to be more active than neutral in 2017.
This does not preclude a weakening of the krone however. Swedish data has been strong coming into 2017 and the overbought levels of USDSEK following the US election and the anticipation of a Federal Reserve rate rise in December both point to a strengthening of the SEK. If inflation expectations hold steady in 2017 then SEK could easily erase its poor performance from the 2nd half of 2016.