FxWirePro: Riksbank banks upon ECB’s stance – EUR/SEK to inch lower in short-run but uptrend to resume in long-run

Despite ultra-loose monetary policy in Sweden, the krona has struggled to weaken past 9.70 against the euro this year. The possibility that the ECB could extend or add more stimulus, combined with the uncertainty around Fed policy, is likely to add pressure on the Riksbank to further ease policy. Headline inflation, at an annual -0.2% in August, is also well below the central bank target, and supports the need for more stimulus.

Meanwhile, recent economic data have been mixed. How much more, however, that can be done to weaken the currency remains unclear. The central bank has already instituted a negative deposit rate and enacted a QE program.

We are skeptical on it can do more and forecast only a modest depreciation against the euro to the 9.39-9.45 range in medium term future. However, we largely rule out a return to the March high against the euro of 9.0547 given recent policy actions. We maintain our medium-term bullish view on the SEK forecasting a gradual move lower in EUR/SEK towards 9.30 in 4M and 9.00 in 12M.