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FxWirePro: Swedish Krona among Scandis underperforming despite economy seems prosperous – Hedge SEK’s further depreciating risks

Apart from Sterling the Swedish krona has recorded one of the weakest performances amongst the G10 currencies this year. That is particularly interesting as the Swedish economy is growing at a comparatively high rate.

Moreover, inflation has been rising since the end of 2015 although it still remains clearly below Swedish Riksbank’s target. Of course, Riksbank has principally eased its monetary policy further this year.

But so did the ECB and the Bank of Japan (BoJ) and they were unable to weaken their currencies. On the contrary: both EUR and JPY have appreciated since the start of the year. Against this background, the krona’s weakness does not seem sustainable.

Either inflation will continue to rise, as Riksbank expects. In that case, it is going to signal an end to its ultra-expansionary monetary policy sooner or later, which should cause krona to appreciate. Or inflation remains at the current low levels which puts Riksbank under pressure to act.

In that case, it could soon find itself in a situation like the ECB or BoJ when it reaches the limits of its possibilities. As soon as the market participants were to realise that they would trade krona at stronger levels, as they are already doing with EUR and JPY.

On data front:

In Norway, today brings retail sales for August, where we expect an increase of 0.8% m/m (consensus: +0.7 %). This is, however, mainly a correction after two weak months and does not mean that private consumption is set to surprise on the upside in Q3 – for that, it needs to be looking at 1.5% m/m. As usual, it is important to remember that consumption of services is growing much more strongly than consumption of goods, so overall growth in private consumption will be solid even with zero growth in consumption of goods.

In Sweden, consumer and manufacturing confidence surveys are due.

EURSEK rose sharply to the highs of 9.6655 but could not sustain those levels to drop back to the current 9.63 levels, while EURNOK has not really reacted to the nervous oil market and continues to trade at low levels following the move lower on the back of the Norges Bank meeting last week. So, EURSEK is foreseen to hit recent highs of 9.67 again.

Technically, USDSEK’s case is also more or less similar to the EURSEK, the pair has been consistently holding higher above 7EMAs to retest the highs of 8.71 and cyclical highs of 8.87 levels.

On hedging grounds, we buy a 2M 25D USDSEK call funded by selling a 6M 25D USDSEK puts in the model portfolio.

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