The main factor behind recent SEK weakness has been the change in Riksbank policy in response to weakening activity data. The repo rate was cut by 25bp in September to 1.25%, and a further cut to 1.00% is possible at the December meeting. However, now that easier policy has been discounted by the market, the SEK seems likely to resume its appreciation. Limits to monetary policy easing are set by growing concern over the level of household debt. More importantly, Sweden is in a very strong structural position on government borrowing and in its external position. The currency is not overvalued, and there is little official concern about its level. We expect its rally to resume as we head towards the end of the year.
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