Swedish krona likely to appreciate gradually in medium-term, says Commerzbank

The SEK is expected to gradually appreciate in the medium-term, according to a Commerzbank research report. As inflation quickens, the Swedish central bank can permit its asset purchasing program to run out it December and wait for additional developments in inflation to unfold. However, it would highlight that it is prepared to become more expansionary again at any time, if the SEK appreciates too sharply or if inflation fails to continue rising as anticipated, noted Commerzbank.

With this strategy, the Riksbank might avoid being left without tools it could use in case it would have to become more expansionary again. This suggests that it might credibly convey to the market that against the backdrop of lower inflation risks, it would allow its bond purchasing program to run out for the time being. The Swedish central bank restricted the amount and duration of its purchasing program from the beginning. Therefore, unlike other central banks, Riksbank is not faced with tapering speculation that would result in the SEK to appreciate sharply.

If inflation continues to be at its low level against expectations, or if the SEK strengthens sharply, the central bank would not hesitate to take action again. As in early 2016, the central bank would begin to communicate to the market that it would not accept if the currency strengthens too quickly and too sharply and might loosen its monetary policy again, stated Commerzbank.

“This could mean a relaunch of the purchasing programme or direct FX market intervention, because the Riksbank will want to avoid even lower interest rates given the potential risks to financial market stability and the property market”, added Commerzbank.