Market Insight – Foreign Exchange – Krona strength may resurface

Swedish economy surpasses expectations

Krona strength may resurface. Swedish growth and underlying inflation have continued to develop strongly, rising to the highest levels in over four years and beating expectations of both its own central bank (Sveriges Riksbank or the “Riksbank”), and the market consensus (see Figure 1). Yet, the EUR/SEK currency pair has risen almost 1.8%* in the past month (SEK weakening), as accommodative monetary measures aimed at limiting Krona strength have been successful. However, at the last two monetary policy meetings, there have been increasing signs that members of the Riksbank’s Executive Board view further monetary easing as unnecessary, especially given the strong outperformance of the Swedish economy and the improving financial environment. Data due in the next three weeks1 will likely reaffirm these views and potentially reduce expectations of intervention. This may remove upward momentum for the EUR/SEK and potentially cause the pair to reverse recent gains.

(Click to enlarge)

Board members voice differing views

The Riksbank cut its benchmark interest rate to -0.5% in February and expanded its asset purchase programme by SEK45bn (US$4.8bn) at its April meeting. The measures were taken to ensure weakness of the Krona and reinforce its important contribution in helping lift inflation. At the last two meetings, Executive Board members have dissented when voting for additional monetary measures, or expressed a more conservative view as to the appropriate course of action. In the absence of a significant catalyst, further monetary measures to weaken the SEK are likely to be met with resistance, especially if upcoming growth and inflation data (due on the 30th May and 14th June respectively) surprise to the upside.

(Click to enlarge)

Resistance ahead

The EUR/SEK is moving towards the higher end of its recent 9.15-9.5 range. Should the pair approach its 2016 high of 9.5046* then it is likely that it will face resistance (see Figure 2). This is because at such levels the Krona weakness would sit in stark contrast to the significant outperformance of the Swedish economy relative to its European peers. In Q4 15, Sweden’s GDP growth was 4.5%*, almost three times that of the Euro Area over the same period.

Important Information

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.