EUR/SEK is approaching the April highs. Near-term vulnerabilities remain elevated, and ING’s baseline scenario for a SEK recovery in the second half of the year faces rising risks.
Riksbank has made the SEK’s path to recovery even narrower
“In the near term, EUR/SEK may well break through the 11.43 April highs and test the 11.50/11.60 area unless the FX market shifts more decisively in favour of high-beta currencies. Even in that scenario, we think EUR/SEK should still find support around 11.20/11.25 given the Riksbank’s unfavourable narrative for SEK.”
“In the longer run, we still think that a stabilisation in risk appetite, and a rotation from the dollar to favour European currencies in the second half of the year can help a gradual decline to the 11.00 area in EUR/SEK. But the Riksbank has likely made the path for the SEK recovery an even narrower one.”
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The Euro to Swedish Krona (EUR/SEK) exchange rate has been experiencing a turbulent few weeks, and cause for further disturbance could be on the horizon. A recent report from ING suggests prospects for the Krona may have gotten worse before it starts to recover.
The ING report comes off the back of the Krona’s recent uncertainty, with the exchange rate now sitting at a weak 10.15, as opposed to the pre-coronavirus rate of 9.47. While the Krona has seen a recovery in line with a weaker Euro and a weaker US Dollar, the optimism has not been unanimous.
Swedish inflation continues to remain low, which limits the scope for the country’s central bank, the Riksbank, to raise rates any time soon. The situation is not helped by uncertainty surrounding the Swedish housing market, with prices falling in November for the second month in a row. As the Swedish economy remains heavily reliant on an overheated housing market, this can create problems.
Adding to the uncertainty is political tensions, which have had a notable effect on the Krona in recent weeks. Long-standing issues with the future of Brexit negotiations have recently been replaced by those surrounding the US elections, as Swedish political scientists Marlene Winberg and Jan Bertilsson suggest “the 2020 presidential election could be the most unpredictable [USA election] in years and could bring further unrest to the global economy.”
The combination of Sweden’s fragile economic situation and ongoing international uncertainty could lead to further issues for the Krona before any recovery begins. However, with inflation expected to pick up and some degree of political stability expected over the coming weeks, the Riksbank looks set to remain patient in allowing the Swedish economy to find its feet before taking action.
Ultimately, it could be a slow recovery for EUR/SEK in the coming weeks, leaving investors in a difficult position while Sweden waits for more positive news from abroad.