Financial markets have rapidly bought the euro as investors substantially increase exposure to undervalued European assets following sharp falls in risk premiums. In our Currency Strategy two weeks ago we argued that this was the positive factor for the euro, set to drive the common currency to 1.35-1.38 in the short- to medium-term. The common currency has appreciated against all but a few counterparts (which include the SEK). Consequently, TCW has fallen substantially (SEK stronger) during the past two weeks (meeting our bullish 6-12 month forecasts). Its current level should therefore be one of key factors which, marginally, could help determine the Riksbank rate decision (we expect a cut; for further details see the SEK section). The central bank board has been divided since 2010. Lars Svensson has been the strongest advocate of a very dovish monetary policy based on the country’s large output gap and little inflation risk (a very accurate view). Perhaps with equal clarity, he has included the SEK in the equation, stating that a relatively tight monetary policy compared to other countries will strengthen the krona (too much).
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SEB tech team