EUR/SEK likely to end 2016 around 9.7, to gradually decline towards 9.20 by end-2017

In the past month, the Swedish krona has continued to depreciate against the euro, compounding the total fall in the currency to about 7 percent year-to-date. The depreciation occurred in spite of positive signs of strength in Sweden’s economy. The Swedish economy had expanded 0.5 percent sequentially in the second quarter.

The flow of both hard and survey data imply that the Sweden economy is expected to have expanded at a similar rate in the third quarter. This would keep the Sweden economy on track to expand by more than 3 percent this year, noted Lloyds Bank in a research report.

However, the weakness of krona shows increasing concerns regarding the prospect of additional monetary easing. The Swedish central bank, Riksbank continues to be particularly sensitive to the outlook of inflation, partially due to the continued weakness in inflation outturns relatively to the Riksbank’s forecasts. On a fundamental basis, the Swedish krona is considerably undervalued; but there is possibility of an extension in asset purchases beyond the end of 2016. This is expected to maintain the EUR/SEK pair around current levels.

“We forecast EUR/SEK to end the year around 9.70 before gradually declining towards 9.20 by end-2017”, added Lloyds Bank.