SEK: Return of the hawks? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that the uptrend that that led to a 13% appreciation in EUR/SEK between summer 2017 and its recent August 29 peak has recently been showing signs of waning.

Key Quotes

“The EUR has underperformed the majority of other G10 currencies since late August, but the SEK has managed the greatest gains on the back of speculation that the Riksbank could be poised to step up its hawkish rhetoric.”

“Assuming the Riksbank tightens policy in the coming months, we see scope for EUR/USD to edge back towards the 10.00 area on a 6 month view.”

“While steady rates are widely expected to be confirmed at this week’s Riksbank policy meeting, there would appear to be a strong risk that the hawkish rhetoric increases.”

“Despite the relative strength of the headline CPI measure, there is concern that much of the upward push in prices is related to the volatile energy component. In September the Riksbank reported that “Different measures of underlying inflation indicate that inflationary pressures are still moderate”.  Additionally, policy makers will be sensitive to the impact of a rate hike on the exchange rate.  Despite the underperformance of the SEK vs. the EUR on a 12 mth view, the Riksbank will be concerned about the FX risks associated with tightening policy ahead of the ECB.”

“For now domestic political uncertainty does not appear to have a significant direct impact on expectations regarding Riksbank policy.”

“While political uncertainty is generally negative for market confidence, this scenario would likely ensure a neutral budget and thus it should bring few shocks for the SEK.  That said, there may be some increased spending on issues that are commonly supported by parliamentarians across the board.  These could include a greater spend on the armed forces and tax cuts for pensioners.  Since Sweden already maintains a small budget surplus, this would not sparks any budget concerns.  A slightly looser fiscal position would support a monetary tightening and therefore a moderately strong tone in the SEK.”