China’s recent devaluation of the Yuan is the latest round in the currency wars and other central banks are weighing their responses. This has raised the stakes for other nations, who will now seek to devalue their currency and adopt unconventional policies to make their exports more competitive. However, the ability of small and open economies in influencing their exchange rate only works in the short-term; therefore it is very difficult for Sweden’s central bank to fight the market if it wants to go the other way.
The Swedish Krona (SEK) has declined more than 1% against the Euro since the Riksbank said it was ready to intervene in currency markets to keep the Krona weak. However, it has traded stronger against most other currencies. Minutes from December’s meeting revealed that some members saw future intervention as necessary.
Inflation has been returning to target in Sweden. On Thursday morning, the Consumer Price Index data for Sweden revealed growth of 0.1% in December annually, recovering from -0.4% in June. The central bank will no longer use deposit interest rates to influence inflation instead interventions in the currency markets. On Monday 4th January, the Riksbank Executive Board made this statement, “the decision required to be able to instantly intervene on the foreign exchange market if necessary, as a complementary monetary policy measure, to safeguard the rise in inflation.” Interest rates are currently at -0.35% in Sweden, Riksbank Deputy Governor Per Jansson said that “the expansive policy potentially has negative side effects and those become bigger the more we do…if there will be a continued need to do more then we’re moving closer to currency interventions.”
EUR-SEK is expected at 9.2000 for this quarter according to a Bloomberg survey. If the Krona strengthens to 9.1000, then this will likely trigger intervention from Riksbank. EUR-SEK is currently trading around 9.28. Interventions from the Riksbank will be to prop up EUR-SEK and see an appreciation in this pair. Therefore, long positions should be considered in the region 9.0000-9.1000. This will also affect USD-SEK as when the central bank intervenes by selling SEK and buying EUR, this will also lead to an appreciation of USD-SEK. The nature of the intervention is likely to be gradual and over time, not a singular, one-day intervention such as done by the Swiss National Bank.
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