Swedish Kronor (SEK) to Strengthen After Riksbank Signals Twilight of Easing

The SEK is forecast to strengthen, according to analysts at Handelsbanken, now the Riksbank has taken its 'foot off the pedal'.

The Swedish kronor is likely to rise according to Swedish lender Handelsbanken after two leading members of the Riksbank suggested the easing cycle may be coming to an end.

With a potentially momentous monetary policy decision on the horizon from the European Central Bank, which is likely to see the euro fall, Handelsbanken forecast a stronger than previously expected fall in EUR/SEK, as SEK rises rapidly from the combination of bullish drivers.

This has led Handelsbanken to reduce their Q2 target for EUR/SEK to 9.00 from the previous 9.10.

Negative Rates Have Worked

The Swedish Central Bank is one of the few in history to have used negative interest rates for its repos - that is its base lending rate to commercial banks – and not just for its deposits, the method used by most other central banks, such as the BOJ and ECB.

This means the Riksbank effectively pay banks to borrow money from it.

This is in order to encourage greater lending to the wider economy.

These unconventional measures have worked very well, according to Riksbank’s First Deputy Governor Cecilia Skingsley:

“Negative interest rates and government bond buying have been successful. Inflation and inflation expectations are rising, growth is good and the Swedish economy is working at close to normal capacity utilization. Now it is time to look ahead!"

She adds she is now more comfortable with a stronger SEK as long as it does not damage the long-term prospects of the economy.

The Riksbank used to use direct FX interventions to weaken the currency, however, these too seem now to be off the table.

Handelsbanken’s inference is that:

“We read this as a clear signal from the Riksbank that, unless something very dramatic occurs, they are done with further easing of the policy.”

Per Jansson Argues Measures Have Been Positive for Labour Market

At the same time as Cecilia Skingsley was giving her newspaper interview, another First Deputy Governor Per Jansson had an article published in another newspaper addressing critics of  monetary policies, in which he claimed the central bank’s easing policies had been key to helping the labour market:

“The labour market would never have been so strong and growth not as high if not for the easing measures they have decided on.”

Both commentary’s seemed to signal the “necrology” of the bank’s easy monetary policy stance, with Handelsbanken saying:

“In our minds, this opens up the possibility for an even stronger SEK than our previous forecast. In the event of the ECB actually managing to beat expectations tomorrow (e.g. by cutting by more than 10 bp and adding EUR 20bn of monthly QE) the move in EURSEK might be aggressive as the Riksbank seem to have widened the confidence range significantly.” 

Handelsbanken then revise down their forecast for EUR/SEK by around 10%:

“While the Riksbank has previously raised their voices with EURSEK in the 9.10-9.15 range we now think a move down to 9 is warranted to prompt any response from the Riksbank. As a result we change our EURSEK-forecast for the end of Q2 to 9.10.”