The Swedish krona has seen some terrible weeks (while many of us have had a well-deserved vacation), with EUR/SEK revisiting post-Brexit peaks of around 9.60. It is not entirely clear why.
We argue that it is not due to the repricing of relative (the ECB versus the Riksbank) monetary policy. It is true that Swedish short rates have outperformed the eurozone but this is due to liquidity and factors related to the upcoming US money-market reform rather than any monetary policy considerations.
Nor is it related to risk sentiment - the normally strong negative correlation between equities (which have rebounded strongly) and EUR/SEK would suggest the latter should be trading around 9.30-9.35.
Yes, there have been a couple of disappointing macro releases, such as Q2 GDP, but this in itself does not explain why the krona should have taken such a hard hit (macro has been weak elsewhere too). We would not put too much emphasis on any house market concerns as a driver behind the collapse in the Swedish currency.
So, what is it? We believe that the normal summer lull is to blame, where 'natural SEK buyers' have been absent (on vacation), both commercial interests stemming from exporters and rebalancing needs stemming from financial institutions (which would need to buy SEK, as foreign assets have increased in value).
In our view, pent-up demand from these 'natural SEK buyers', together with strong economic fundamentals where the krona is substantially undervalued versus the euro and US dollar and where the Swedish growth outlook, while moderating, remains strong on a relative basis, will help the krona to take back most of its summer losses in the weeks to come.
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