Swedish Krona Forecast Higher in 2016

BNP Paribas say they see the Swedish krona (SEK) higher in 2016 on the back of stronger economic growth and a less doveish Riksbank.

Researchers at Skandinaviska Enskilda Banken (SEB) recommended, in a recent research note: “selling GBP/SEK at 13.02 targeting 12.50, (but we aim for levels at 12.00).”

Now researchers at PNB Paribas are bullish too, favouring 'fading' the weakening SEK: 

"With the better Macro outlook heading into 2016, likely to curb expectations for further Riksbank easing down the road, short EUR/SEK remains a favoured trade for us in 2016."

Nevertheless the currency team at BNP Paribas still expect the Riksbank to go ahead and ease at the next rate meting on the 15th: 

"Despite the evolution of price data we think both the Riksbank and Norges Bank will proceed with further easing next week."

Their view will have gained credibility since Swedish inflation data on Thursday undershot expectations, by coming out at 0.1% instead of 0.2%, further increasing the liklihood of a more accommodation. 

Stronger Growth Outlook

Q3 GDP data led some market-watchers to revise their previously bearish view of the kronor, after it showed an exceptional 0.8% growth, outpacing the consensus estimate of 0.4%.

Furthermore, strategists at SEB see annual growth rising to between 3.0 - 4.0%, reasserting the Swedish economy at the upper end of the growth spectrum in Western Europe.

An unusual surprise spike higher by SEK following the release of the last Riksbank’s October rate meeting statement, and despite the bank announcing a further 65bn in asset purchases, foreshadowed similar moves in currency markets following other central bank announcements – the same was witnessed with the stronger euro after the ECB’s announcement of easing in December, and NZD appreciating after the RBNZ rate meeting on Wednesday.

Easing cycle to petter out 

SEB now sees the the Riksbank as entering a new era of less doveish monetary policy:

“With the Riksbank approaching the end of its easing cycle, we still think it “impossible” to run QE in Sweden to 2017.”

Some think the central bank could even tolerate a stronger SEK.

Camilla ViIland at DNB Bank ASA, also sees the Riksbank reaching the end of its cycle and tolerating a stronger kronor:

“The Swedish Economy has developed more strongly than expected. Despite more measures from the Riksbank the SEK has strengthened. The SEK has been a key focus for the central bank as a rapid strengthening of the currency risks halting the inflation upturn that has begun. In 2016 we expect Swedish Growth to remain strong and inflation to move towards target. Consequently Riksbanken is likely to tolerate a stronger SEK.”

A view that the short SEK trade is now overcrowded has also informed a more bullish outlook in 2016, reflected in SEB analyst Carl Hammer’s comment that:

“The Market is short SEK and the country is expected to grow by 3.0-4.0%.”

Inflation blip

Swedish Inflation data out on thursday, however, disappointed markets by coming out at only 0.1%, for the third month running, when expectations had been for a rise of 0.2%.

The Kronor started to depreciate after the release, reaching highs of 12.90 versus sterling, although it has since pulled back to 12.86.

The lower-than-expected result may have brought into the question, whether the Riksbank is really at the end of its easing cycle, and also whether it will continue to tolerate a stronger SEK going forward.

SEB's recent investor survey showed a very high 82.0% expected the Riksbank to leave monetary policy unchanged at the next meeting on December 15, however, however, whether this figure has altered since this morning's moribund inflation data is not clear.

Nevertheless, further clarity will no-doubt be provided by the Riksbank itself, when it meets next week.