SEK: Sickness to last – Nordea

Martin Enlund, analyst at Nordea Markets, suggests that the Riksbank and the Swedish economy are in an even worse spot than previously anticipated and further central bank easing, and weaker growth, may prompt an even weaker SEK especially later this year.

Key Quotes

“We now expect the Riksbank to lower the repo rate back down to -0.50% later this year. More easing can’t be ruled out should inflation expectations fail to recover. As a result, we revise our forecast for the SEK in a weaker direction for the rest of this year but remain somewhat hopeful looking ahead into 2020 and 2021.”

“If the Riksbank cuts rates, as we believe, then from a relative rates / relative yield perspective it is likely to be bad news for the SEK. However, it’s not as if neither rates nor yields have had a good predictive power as of late. One might argue that the SEK – being close to record-weak as it is – is already pricing-in such an outcome.”

“A weaker SEK in the near term is also supported by recent trends. While Riksbank Governor Ingves has argued that “we have to live with an exchange rate that fluctuates”, market participants will note that EUR/SEK has been fluctuating in one single direction since 2012. Which is from the bottom left to the top right. Unless the trend changes, we could have been targeting 12.0+ for 2021 rather than our more optimistic estimate of 10.30.”

“Valuation might also start mattering at some point – the SEK has never been as weak as it is right about now.”

“While we think the Riksbank will keep failing to boost inflation sustainably to the 2% target in coming years, we do not expect it to launch further easing than the aforementioned rate cut. Implicitly we thus forecast a hawkish change to the Riksbank's reaction function. If we are wrong on this, the SEK might weaken more in 2020 and 2021 than we currently anticipate.”