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CURRENCY ANALYSIS

SEK – Swedish Krona

SEK, Swedish Krona, Currency Analysis, fx trader, forex

At its meeting of 21 December the Riksbank left interest rates unchanged at -0.50%, but like the ECB did on 8 December, it extended its asset purchase programme from December 2016 to June 2017, with monthly purchases set at 30 billion kronas.

The central bank’s decision has not weakened the Swedish krona, which in fact appreciated on the announcement from EUR/SEK 9.72 to 9.62. The exchange rate’s reaction is explained by the fact that the Riksbank did has not stepped up monetary stimulus due to a deterioration of the domestic picture – which has not occurred – but only for precautionary reasons.

As is also the case elsewhere, inflation is gradually rising back in Sweden, but downside risks have not entirely disappeared, therefore the Riksbank has opted to keep monetary conditions still very accommodative, in order to prevent a derailing of inflation from its upward course towards target.

Among the variables which could place at risk the return of inflation to target, the central bank mentioned the exchange rate in particular. This is because the recent rise in US rates, and the simultaneous extension of monetary stimulus by the ECB – i.e. renewed divergence between the Fed and the ECB – downside pressures to the EUR/USD exchange rate could replicate on the EUR/SEK exchange rate, pushing up the Swedish krona as a result.

By “copying” the ECB’s latest policy move – stable rates and extension of the purchase programme – the Riksbank aims to stabilise differentials between euro and Swedish yield, preventing a widening that would otherwise have led to a stable appreciation of the krona against the euro.

Returning to the macro picture, for what concerns growth, forecasts for 2016 and 2017 have been revised slightly upwards compared to the October scenario, respectively from 3.3% to 3.4%, and from 2.0% to 2.4%. The deceleration from the brilliant 4.1% rate achieved in 2015 should not be read as a deterioration, but rather as a normalisation. Unemployment is also expected to drop, from 6.9% estimated this year to 6.7% in 2017. The fact that growth forecasts have been revised downwards for the longer run, in 2018 and 2019, and that in the same biennium unemployment is projected stable, should not be interpreted negatively, but again as a normalisation of macro trends, compatible with a simultaneous normalisation of monetary policies.

The Riksbank expects to resume hiking rates in 2018, and to restore them to positive territory in 2019. In the near term, however, it has reasserted that it is ready to loosen monetary policy further if necessary, for instance if the krona appreciates significantly, returning towards the levels hit at the beginning of the year at around EUR/SEK 9.20.

For what concerns inflation, on the other hand, the Riksbank’s forecasts have remained unchanged for the entire 2016-2018 three-year period, respectively at 1.0%-1.4%-2.2%, and have been raised for 2019 from 2.9% to 3.0%. Therefore, return to target is expected in 2018.

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