Sweden: Krona at multi-year low and decline isn’t over yet

EUR/SEK broke above the May high of 10.6960 reaching the highest level since 2009. This is in line with our bearish SEK view and our non-consensus target of EUR/SEK 11.00 by the year-end.

As per Swedish elections: Muddy waters, we see the Swedish krona very vulnerable in the current environment as both domestic and external factors point to more SEK weakness. On the domestic side, the upcoming elections on 9 September should keep SEK risk premium in place (and even lead to further widening as the SEK discount vs EUR remains lower compared to the episodes earlier in the year – as shown in Figure 1.

In addition:

• the dovish Riksbank (we don’t expect the central bank to provide help to the battered SEK on the 6th September meeting – if anything we see a risk of a modestly dovish language),
• slowing economy (as per today’s very weak July retail sales),
• deteriorating Swedish current account vs EZ (Fig 2), and
• cheap funding costs

should all keep SEK under pressure for the remainder of the year.

On the external side, the spectre of trade wars is a clear negative for SEK as Sweden is a small open economy, thus vulnerable to concerns about the direction of the global trade.

In the relative value space, we continue to favour long NOK/SEK positions as (a) elections will weigh on SEK and (b) the Norges Bank rate hike in September will support NOK. NOK/SEK to break above the 1.10 level rather soon.