RBC Not Jumping On The Swedish Krona Bull Bandwagon Just Yet

SEK weakening despite high hopes

After 4 days of sharp losses in its exchange rate, last week the Swedish Krona finally caught a bid after bouncing off psychological resistance 0.7500. As hopes have risen for higher interest rates, investors have started looking for the next G10 bank which might join the Bank of Canada and raise rates. Prime candidates are countries with impressive growth, solid inflation and elevated house prices which are a concern for economic stability. Sweden has been posting world-beating growth for quite some time and as a result optimism around the Riksbank making a hawkish move has been rising, particularly as inflation actually moved above target recently, although price pressure has in general been pretty subdued. Add to this mix that Swedish monetary policy is still amongst the loosest in the world with rates well into negative territory and a massive QE program and you can see what has got markets so excited.

Riksbank gradualism bad news for SEK despite market bullishness

The problem is that the Riksbank seem to have little appetite to tighten anytime soon, and each meeting seems to be another opportunity for them to remind markets just how dovish they still are despite the apparently booming economy. The fact that the ECB is pursuing such a gradualist approach is probably a major reason that the Swedish Central Bank feels such a need to go slow. FX strategists at RBC released a report in which they demonstrate their less than bullish opinion of the SEK, as the market consensus seems too overwhelming and long Krona too obvious a trade

“Analysts are more bullish on SEK than any other G10 currency and the price action around news events suggests investors are positioned the same way. We went tactically short SEK this week, ahead of the Riksbank announcement. This is a trade we expect to return to opportunistically in the absence of evidence of much cleaner market positioning or a shift in the reaction function of the Riksbank. While the medium-term case for being long SEK seems compelling, we still think it is premature to position that way.”

Picking your moment with the Krona seems to be the key. When the Riksbank does turn hawkish they know there is a tidal wave of money that is going to flood into the SEK and fear of derailing the current recovery is certainly keeping them cautious for now. They will probably need to lag the ECB and with Draghi moving in slow motion, inflation will have to strongly outperform to force the Riksbank’s hand.