Riksbank to prevent undue strength of SEK

The SEK was under pressure from mid-July until recently as market participants increasingly bet in the direction of a hawkish Fed and a soft Riksbank (buying USD/SEK). EUR/SEK temporarily decoupled from the fixed income market as a result.

These speculative flows at a time pushed the SEK 2.5% weaker than the Riksbank expected in July. The "devaluation" of the CNY by PBoC and the surprisingly high Swedish inflation outcome did however wrong-foot this hot money in August, spilling over into a stronger SEK against EUR. 

If some of these positions are still present in the SEK, a break below 8.4759 in USD/SEK could weigh on EUR/SEK as hot money since mid-July would see mark-to-market losses on their positions below this level, potentially prompting a realization of losses, states Nordea Bank.

Unless the Riksbank changes its reaction function, the krona is likely to remain crucial for the Swedish inflation outlook, and hence the Riksbank will continue to prevent any undue SEK strength. For more thoughts on whether the Riksbank will change reaction function - and potential triggers, have a look at SEK.

"If the Federal Reserve turns more dovish - and the USD weakens as a result, then the pressure will rise on the Riksbank to do more. The same applies with the ECB - with inflation markets pricing in negative HICP inflation readings in coming months - if the market starts to expect the ECB to do more, the Riksbank will be under rising pressure to do more as well (further repo rate cuts and/or increased asset purchases)", argues Nordea Bank.