SEK: Have we underestimated the impact of QE or the USD? – Nordea Markets

Martin Enlund, Research Analyst at Nordea Markets, points out that the SEK is remarkably weak and while they still predict a stronger SEK down the road, there are few positive triggers in the near term.

Key Quotes

“The SEK is amazingly weak. In inflation-adjusted, trade-weighted terms the SEK recently reached its weakest level since March 2009 when the global economy was in a very different spot. Back then the global financial crisis was still roaring, and global risk appetite was yet to recover.”

“Now, ten years later, global growth has generally been humming along, trade volumes have been growing (despite the US president’s trade war) and risk appetite has been resilient especially in the US. Such factors are generally positive for the SEK, but the SEK is still close to record-weak levels.”

“If we are right in our Riksbank call, the market will be disappointed again and again by the dovish stance of the Riksbank. Indeed, comparing our forecast for the Riksbank to market pricing suggests little support for the SEK in coming quarters; not that interest rate spreads appears to have mattered that much for the SEK this year. EUR/SEK trades much higher than implied by various rate or yield spreads.”

“It may be that we have underestimated the impact from the Riksbank’s QE programme on the SEK via various flow effects.”

“The rise in EUR/SEK this year has generally coincided with foreign accounts reducing their holdings of SGBs.”

“If the Riksbank now needs to increasingly buy bonds from foreign holders, its QE programme may be having a greater negative effect on the SEK than anticipated even though it is buying a smaller amount of bonds per month than in the past.”

“It could also be that Swedish entities, faced with extremely high costs for hedging against USD weakness (the highest ever on Bloomberg data), have opted to leave their currency exposures more open. While this pertains to USD/SEK, USD flows can affect EUR/SEK.”

“These flow-related arguments (Riksbank QE and changed USD hedging policies among Swedish entities) on top of the usual macro culprits may help explain why the SEK is trading at such weak levels.”

“If this is the key for a turnaround in the SEK (lower EUR/SEK), we will need to see either the end of the Riksbank’s balance sheet expansion (February 2019) or a turnaround in the dollar (Q4 2018 in our forecast) before we can finally expect some material downside in EUR/SEK.”

“While the Swedish election may prompt a somewhat lower EUR/SEK, as we find the political risks in Sweden overstated, we see few other macro triggers for correcting the value of the SEK in the near term. We thus hike our forecast for EUR/SEK yet once more.”

“We still expect a stronger SEK down the road, as a combination of a peak in the dollar, an end to the Riksbank’s QE programme and extremely supportive valuation will eventually contribute to a stronger SEK.”