Riksbank decision favours SEK weakness
The Riksbank decision yesterday opens up the pathway for potential more SEK weakness going forward. The key reasons for this potential upcoming weakness are as follows:
1. QE purchases are increased to SEK500B from SEK300B. Remember that QE weakens a currency, so that is a reason for SEK weakness going forward.
2. The Riksbank is prepared to cut rates if seen as effective. Here is the extract from the release, ' The Riksbank is prepared to continue to use the tools at its disposal to provide support to the economy and inflation. The repo rate can also be cut, if this is assessed to be an effective measure'.
3. The clear inference from point 2 is that the Riksbank is prepared to take rates back below zero if necessary
Now the SEK had a strong rebound against the EUR recently, but this reopens the case for EURSEK bulls. Take a look at the technical picture where bulls might join EURSEK long including buying at market. It is reasonable to expect more prolonged SEK weakness now the Riksbank have shown a bearish hand. You can read the full report here.
By contrast Europe has falling COVID-19 cases and a huge spending PEPP programme of over €1 trillion alongside a proposed Recovery Fund to support the most struggling EU members like Italy. This should keep the EUR supported in the medium term and provide EURSEK upside. As long as favourable divergences remain between the EUR and the SEK near term risk can be managed below 200DEMA and ascending trendline targeting most recent swing highs. See chart below:
ING however are not convinced on further EURSEK upside and see the pair trading at 10.00 by year end. Here is their take on the decision -
We don't see today's decision as a game changer for Sweden's krona, and so far the impact on the currency has been fairly limited. The bar for a rate cut is high, the extension of QE is not a complete surprise (the timing of the decision may be, but not the extension itself) and the prime driver of SEK should continue to be the general risk environment, which we expect be constructive in the second half of the year.
We therefore look for EUR/SEK to move towards 10.00 by the year end.
