Why the Krona is Powering Though Riksbank Rate Cuts

Above: Riksbank Governor Erik Thedéen delivers the post-decision media briefing.

Sweden's central bank today cut interest rates again, but this doesn't bother the Krona which remains an outperformer.

The Pound to Krona exchange rate is in the red for a second successive day at 13.52 after the Riksbank cut the policy rate by 25 basis points and said more were coming.

This is the third interest rate cut in the current cycle and the central bank revised its expected interest rate path lower, shoring up expectations for the next move to come in November.

Yet, the SEK is trending higher against the Euro and Dollar while resisting the Pound's advances better than most. Why is this?

"The Swedish krona is the 3rd best performing G10 currency so far in September with the strong revival in risk appetite helping to fuel SEK buying," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank Ltd.

The rule of thumb is that when a central bank is 'outcutting' its rivals, the currency it issues should underperform.

But the SEK's performance reminds us that what other central banks do matters, and the condition of global markets also counts. With the European Central Bank and U.S. Federal Reserve also likely to cut rates, Riksbank doesn't seem like such an outlier.

Meanwhile, rate cuts at the Fed are supportive of global sentiment and equities, which tends to bolster the SEK as this currency has a high beta (positive correlation and responsiveness) to global equity markets.

"SEK remains a high-beta G10 currency and is vulnerable to broader risk conditions," says Halpenny.

Markets were also well prepared for the Riksbank's cut as the August monetary policy report said "the policy rate can be cut two or three times before the end of the year" if the inflation outlook remains favourable.

Sweden's inflation continues to fall, and market sentiment is buoyant amidst the promise of further Federal Reserve rate cuts. This will continue to aid SEK higher.