Forex Investment and Currency Trading

The SEK outlook is clouded by Sweden’s position as a small open economy. Domestic demand is still reasonably strong and this will provide some insulation. So too the country’s solid current account surplus position, though judging by the performance of the NOK during the current bout of risk aversion, support from this source may be meagre. SEK remains too rich to the NOK. That has been the case for some months. A corrective rally in NOK/SEK looms.

That EUR/SEK has drifted to the top end of its twelve month trading range largely reflects EUR strength rather than SEK weakness. SEK has performed relatively well against most other currencies but has under- against the EUR vis-a-vis changes in rate spreads. In part this reflects the SEK’s positive correlation with falling equity markets. Scope for EUR/SEK is still seen to fall to 9.30 even if the global outlook stays shaky.

Rate spreads and how the EUR performs will determine whether the currency rises further. The Riksbank’s decision to hike rates in February was a surprise. Yes, the last policy statement back in December indicated that the Bank expected to raise rates in Q1. However, given the deteriorating global picture, the Riksbank was expected to leave rates on hold until the outlook became clear. The central bank decided instead that the outlook hadn’t changed significantly enough to warrant a deviation from their previously announced policy. It has largely been vindicated so far as European survey data in particular have held up. Future data won’t be so kind as the Swedish economy is past its cyclical peak. Inflation will rise but higher inflation will only be transitory. Unless there’s a dramatic improvement in the data, the Riksbank is finished tightening policy.

Slowing Eurozone growth and ECB rate cuts later this year will see EUR/SEK come under further downward pressure. EUR weakness will drag the SEK lower against the USD, CHF and JPY, though it should perform better against NZD and AUD.