Current weakness of Swedish krona not sustainable, says Commerzbank

The Swedish central bank, Riksbank’s, strategy has been working quite well so far for preventing an excessively rapid appreciation of the Swedish krona. Since the spring, the SEK has appreciated and has also depreciated against the euro, thereby underpinning the positive inflation trend in Sweden. Finally it paid off that the central bank loosened its policy pre-emptively thereby showing that it responds quite sensitively to inflation risks.

The market has understood not to test the lower end of the EUR/SEK pair. There is a high risk of central bank easing its policy again or directly intervening in the FX market against an appreciating krona, said Commerzbank in a research note.

But, there is no likelihood that the appreciation trend in EUR/SEK would continue. In contrast to that, the current weakness in SEK is not sustainable. Either inflation would continue to accelerate as the central bank projects, in which case it might also hint at ending its ultra expansionary monetary policy at certain point that might result in krona appreciating. Or inflation continues to stay at the current low levels that might put Riksbank under pressure to act.

In that case, the Riksbank might find itself in a same situation to the BoJ or ECB. Both these central banks have reached the end of the monetary policy lines and therefore they have not been able to weaken their currencies recently by extending their present bond purchases and negative interest rates, according to Commerzbank.

The Swedish central bank might face a similar situation. The Riksbank’s policy tools are also reaching the limit and might become less effective with every extension, added Commerzbank.