SEK: Rally appears to have now lost momentum – Riksbank

According to Jane Foley, senior FX strategist at Rabobank, today’s release of the minutes of the Riksbank’s December 18 policy meeting provides a little more clarity on the Executive Board’s decision to end it use of negative interest rates.

Key Quotes

“Although the risk of a rate hike last month had been well publicised by the Riksbank ahead of the move, it was not a unanimous decision. Two members of the Board entered reservations, favouring for a delay to any rate hike. We have argued that the relatively soft value of the SEK had facilitated last month’s rate hike insofar as it contributed to the accommodative set of monetary conditions. While EUR/SEK fell around 4.5% between mid-October and the end of last year in response to the Riksbank’s hawkish position, the value of the SEK is still relatively soft.”

“Even though the Executive Board will likely welcome the news that the SEK’s rally appears to have now lost momentum, given the low level of global rates it would appear that the chances of any further rate hike from the Riksbank in the foreseeable future is extremely remote.”

“We maintain that the outlook for inflation will be very dependent on the performance of EUR/SEK. The recent rally in the SEK vs. the EUR does little to diminish the fact that EUR/SEK has been on an uptrend since 2012. This has meant that on many measures of fair value (though not all), the SEK is now undervalued vs. the EUR.”

“The Riksbank is still keen to emphasise that monetary conditions remain accommodative. The December minutes state that “with a repo rate of zero per cent in the coming years and the Riksbank’s extensive purchases of government bonds, monetary policy remains very expansionary”. The policy position suggests that scope for another further recovery in the SEK is likely to be subdued particularly given downside risks to growth. We see scope for only a modest recovery for the SEK back towards EUR/SEK10.40 on a 6 month view.”