Swedish Krona Prospects Brighten after Riksbank Readies for Lift-off in Earnest 

 "Erik Thedéen has showed that he and this “new” Riksbank board are determined in their fight against inflation and the weak krona" - Swedbank.

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The Krona swept aside most opposition to become the best-performing major currency for the week to Friday after the Sveriges Riksbank lifted its forecasts for inflation and interest rates notably, placing a floor under Swedish currency and leading analysts to anticipate brighter days ahead. 

Sweden's Krona climbed against all counterparts in the G10 basket while making gains in relation to much of the G20 contingent where the Mexican Peso was the only other unit to outperform what was previously the worst-performing major currency of the year thus far.

Norway's Krone slipped into the bottom spot among majors for 2023 after the Riksbank revised its forecasts to imply that Sweden's cash rate could reach 3.25% or  more later this year, drawing to a decisive end the almost decade long period of near-zero borrowing costs.

"With the greater SEK support from the Riksbank, some of the case for going long EUR/SEK should be losing attraction already now," says Jussi Hiljanen, chief strategist for USD and EUR rates, at SEB. 

"Large moves are usually followed by partial corrections, but for now it could take a clear crisis for recent highs to be approached again," he adds. 

Above: GBP/SEK shown at hourly intervals alongside EUR/SEK. Click image for closer inspection. 

Thursday's updated forecasts suggested Swedish inflation is likely to come in lower than was previously anticipated this year but also warned of a stronger than once envisaged outcome for 2024, prompting a change in the Riksbank's approach to ensuring price stability under new Governor Erik Thedéen.

The new interest rate forecast suggests 3.33% for later this year, implying some probability of the benchmark interest rate being lifted as far as 3.5% in order to ensure inflation makes a timely return to the bank's target. 

In addition, the Riksbank said on Thursday that from April this year the bank will begin actively selling bonds from the portfolio built up as part of its pandemic period quantitative easing programme, making it one of only two central banks in Europe to attempt such an excercise. 

"Erik Thedéen has showed that he and this “new” Riksbank board are determined in their fight against inflation and the weak krona," says Knut Hallberg, a senior economist at Swedbank. 

"We continue to see some upside risks to the Riksbank's near-term forecast, despite the upward revision," Hallberg adds.

Above: GBP/SEK shown at daily intervals alongside EUR/SEK. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alerthere.

Thursday's policy actions show the bank is serious about drawing a line under the era of near-zero or otherwise subzero interest rates that has depressed returns on capital in Europe for the best part of the last decade while stoking asset price bubbles in many countries.

That era resulted from an even longer period over which inflation spent much of the time falling and for many different reasons including the legacy of the financial and debt crises as well as the 'globalisation' process that moved production of manufactured goods to lower cost jurisdictions. 

However, with Russia's invasion of Ukraine threatening energy security across the continent at a point when economies are still awash with the money liquidity provided through pandemic policy programmes, inflation has returned with vengeance and forced the Riksbank's hand. 

"Bar the recent Riksbank and NOK CPI induced rebounds both NOK and SEK have had a weak start to the year attributable to both moves in relative rates, an underperforming energy complex (for NOK) and house price concerns (for SEK)," says Stefan Mellin, a senior analyst at Danske Bank. 

"We continue to expect the SEK to struggle over the medium-term horizon on the back of a relatively worse outlook for the Swedish economy compared to peers, valuation as well as an increased risk of overtightening by the Riksbank," Mellin writes in a Friday forecast review. 

Source: Danske Bank. Click image for closer inspection.