EUR/SEK to move downward towards 10.00 in the first half of 2021 – Rabobank

According to economists at Rabobank, there are several factors which argue that the Riksbank could announce an extension of its QE policy at tomorrow’s meeting, possibly to the end of 2021. The EUR/SEK pair is currently approaching the 10.10 level and given widespread expectations of a policy announcement from the ECB next months, it might be difficult for the Riksbank to do little more than slow the downtrend in EUR/SEK.

Key quotes

“The SEK is the best performing G10 currency in the year to date. Irrespective, the fact that Sweden is suffering from soft inflation pressures and that the Riksbank has expressed that it is open to inflation being allowed to overshoot its 2% target before tightening conditions will raise the concerns of monetary policymakers regarding this year’s gains in the SEK. While it may be too much of a drastic measure for policymakers to announce a return to negative interest rates, there could be a strong case for the Riksbank to announce an extension to its QE policy soon.”

“After tomorrow’s meeting, the Riksbank is not due to meet again until February 11. Given the backdrop of the pandemic, of the new government restrictions on social activities and the forthcoming ECB meeting, a 3 month wait until the next gathering does appear to be a long interval. There is always the possibility of an emergency inter-meeting discussion by policy-makers, though this may give the impression that they are panicked. Instead, they may be a greater chance of a pre-emptive announcement this week on QE.”

“The economic outlook may also support further policy measures. The recent announcement by the Swedish government of coronavirus linked restrictions could mean that the economy could contract in Q4. This casts doubt on the Riksbank’s current forecast that the total loss in Swedish GDP this year will be just 4%. The possibility of a contraction in Q4 GDP output heightens the downside risks to inflation.”

“A surprise announcement of policy from the Riksbank tomorrow should allow for a move back towards the 10.30 area. While there is scope for a pullback this week, we have revised our EUR/SEK forecasts lower and see scope for a move to 10.00 on a 3 to 6 month view.”