EUR/SEK likely to trade lower at 9.4 by end-2016, below 9 by mid-2017

So far in 2016, excluding the British pound, the Swedish krona has been the worst performing G10 currency against the EUR. The currency pair EUR/SEK’s higher move, especially after reaching a year-to-date low in April, could be mainly due to the relative shift in the interest rates, said Lloyds Bank in a research note.

The move lower in Swedish yields made the SEK an attractive funding currency, and momentarily pushed the pair above 9.60 earlier in September. The depreciation in SEK and likely boost to inflation has reduced the need for the Swedish central bank, Riksbank, to provide more policy easing for now. Several policy officials have reiterated their commitment to do more; however, the bar to further easing continues to be high, added Lloyds Bank.

In spite of the Swedish economic growth weakening in the second quarter, strongly activity is expected to prevail in the second half of 2016. Furthermore, long-term inflation expectations continue to be resilient. The Swedish central bank is expected to refrain from additional easing of policy or extend its asset purchases beyond the end of 2016, given the absence of a noticeable weakening in the inflation outlook.

“We forecast the EUR/SEK to decline to 9.40 by year end and to below 9.00by mid-2017”, stated Lloyds Bank.