Currency Forecasters Bet on Riksbank to Revive Krona's Fortunes

(Bloomberg) -- Sweden’s struggling currency is poised for a rebound as the country’s central bank will reiterate its intent to raise rates later this year.

With inflation just a shade below Riksbank’s 2 percent target, policy makers will stick with their pledge to move away from negative interest rates when they meet Thursday, analysts say. That could spur a rally in the krona, this year’s worst-performing major currency, according to NatWest Markets and Danske Bank A/S.

Currency Forecasters Bet on Riksbank to Revive Krona's Fortunes

The krona has fallen more than 3 percent this year to trade around 10.50 per euro, confounding predictions it would be the top performer among peers as Riksbank began removing crisis-era stimulus. The Swedish currency weakened for a sixth consecutive day Wednesday. It is still tipped in a Bloomberg survey to end 2019 as the best among the Group-of-10 currencies.

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Below is a selection of analysts’ views on the krona’s outlook:

NatWest Markets (Stay short EUR/SEK)

  • Strategists at NatWest, including Nick Mannion, say markets “underestimate” the shift in the Riksbank’s reaction function in recent months
  • Central bank will reiterate plans for a rate hike in the second half of 2019, with only marginal downward revisions at most to the rate path
    • This will be “interpreted hawkishly” by markets, reinforcing policy divergence versus the ECB, according to Mannion, who recommends staying short EUR/SEK
    • The weak krona should also likely reduce sensitivity to a dovish ECB
  • While near-term inflation forecasts will be revised lower Thursday, NatWest strategists expect the Riksbank to remain relatively optimistic on medium-term inflation prospects

Danske Bank (Hike path intact)

  • Expect Riksbank to come across as hawkish at the April meeting, SEK could break below 10.40 to euro and a test of 10.20 could possibly be in the cards, according to Christin Tuxen, head of currency strategy at Danske
    • Danske strategists have lowered their 1-3 month EUR/SEK targets to 10.35 (from 10.50) and 10.20 ( from 10.40)
  • Do not underestimate the volatility of the cross in response to Riksbank actions this week, Tuxen cautions
  • Should the Riksbank lower the rate path after all, EUR/SEK could once again challenge the 10.60 highs -- not a central case
  • Sees krona coming under selling pressure only later this year -- have lifted their 6-12-month forecasts to 10.40 (from 10.30) and 10.50 ( from 10.30)

Nordea Bank ABP (Risk of hike signal)

  • While bank’s central scenario is for a small downward revision in the policy path for the second half of 2019, it still sees a 30 percent chance of a hike being signaled, in which case EUR/SEK could fall
  • It is very unlikely that the Riksbank will revise its rate path downward all the way to the “very soft” market pricing, according to analysts at Nordea, including Mats Hyden
    • The risk-reward for betting on a soft rate decision is poor
  • There are unusually many alternatives for this week’s Riksbank scenarios

BBVA (Buyer of krona dips)

  • Expects the Riksbank to stick to the same message that anticipates the next rate hike coming during the second half of 2019, says Alexandre Dolci, currency strategist at BBVA
  • Tone might be somewhat tweaked as the new repo rate path could suggest that a December move has now become more likely than a September/October one
    • Krona could be at risk of renewed slippage, which would then eventually see EUR/SEK revisiting its recent highs above 10.60
  • Would use that weakness to “reload EUR/SEK shorts” due to Sweden’s superior outlook versus the euro zone, unless the Riksbank surprises the market with a sharp U-turn and sounds overly dovish

SEB AB (Potential for large reaction)

  • Thursday’s meeting has “potential for large market reactions,” according to SEB strategists including Karl Steiner
  • EUR/SEK could decline by more than 10 figures if Riksbank leaves the path unchanged as it would clearly indicate a shift in its reaction function and that it wants to hike the repo rate this fall. The short end of the rate curve could increase by almost 10bps
  • SEB’s main scenario is Riksbank delivers a more dovish outcome -- a small dovish shift would be in line with markets and SEK moves will be limited
  • Downside in rates is limited given the cautious pricing and SEB strategists stick to view that the risk/reward is for higher rates

Credit Agricole (Mild krona positive)

  • Should officials stay on course for gradual policy normalization, it “could play out as a mild SEK positive and help reverse some of the recent losses,” according to Valentin Marinov, head of G-10 currency strategy
  • The ensuing divergence between the Riksbank and the ECB may also help push EUR/SEK lower from here
  • There is a scope for higher vol in SEK crosses, Marinov says, adding that SEK vols are still looking cheap

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