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EUR/SEK at 8-Year High as Krona Struggles with Dovish Riksbank, Trade War

Posted Apr 08, 2018

Scandinavia’s most important exchange rate, EUR/SEK, continues to make new ground for this decade. The rate climbed last week to its highest since 2009, at 10.35, reflecting a grim outlook for the Swedish krona – one in which it wrestles with a dovish central bank and the threat of an international trade war.

The krona, which ranks as the world’s ninth most traded currency, has lost more than 5% against the euro in 2018 and has recently overtaken the Canadian dollar to become the worst performing G10 currency of the year. The amount of krona per euro remains a decidedly important factor for the economy of Sweden given that half of the country’s trade is with EU countries.

At the forefront of krona news flow in recent months has been the dovish U-turn by Sweden’s central bank, the Riksbank.

In early 2018, upbeat comments from the Riksbank prompted a number of analysts to recommend buying the krona. In January, the bank’s governor, Stefan Ingves, suggested that inflation was finally aligned with the bank’s target and that the time for monetary policy normalization was near after years of aggressive stimulus, which have seen both quantitative easing and negative interest rates deployed.

One can imagine the disappointment then, when in March, Ingves stressed to parliament the importance of “proceeding cautiously” on interest rate increases, further retreating from the bank’s previous optimism and adding to the clear concerns for inflation expressed in the bank’s most recent meeting minutes. Inflation in Sweden has deteriorated markedly since last summer, falling from 2.2% to just 1.6% in the year to February, well below the Riksbank’s 2% target.

As a currency sensitive to global growth, the krona has also been tossed around amid the storm surrounding US-China trade. A trade war between the two could, according to analysts, derail the global economy’s recovery, and this remains a possibility given Wednesday’s announcement by China of tit-for-tat tariffs and Friday’s threats by the US of more of the same.

In the coming year, the krona is likely to claw back some ground against the euro, according to Danske Bank, but aspirations for rates below 10.0 in the near term will need to be quashed.

Danske predicts a EUR/SEK rate of 10.3 at the end of June and only one-third of Danske’s clients see sub-10.0 rates at any point within the second quarter. Danske believes that inflation and the housing market will be closely watched by the Riksbank in the months ahead, but with both deteriorating, the krona will remain heavy.

“The inflation outlook, which is on a downward slope; and second, growth momentum, which is deteriorating markedly on the back of house price deflation and the slowdown in housing investments…suggest that the Riksbank will not raise rates this year and not as quickly as the market is pricing in,” said Danske analyst Mathias Mogensen on Friday.

The Riksbank is next scheduled to announce changes to monetary policy on April 26th; however, investors will get an update on inflation when Statistics Sweden releases data on April 12th.


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