FxWirePro: What drives bullish Swedish Krona and what are the risk factors?
The anemic performance of the currency contrasts with the vibrant Swedish economy which a raft of indicators would suggest is now expanding at or above a 4% growth rate.
This disconnect between a vigorous economy and a structurally feeble currency is nothing new of course and reflects the Riksbank’s enduring obsession with delivering core inflation at target. This singular focus on inflation has had the effect of desensitizing the exchange rate to bullish trends in the real economy.
We remain cautiously constructive SEK but recognize that inflation needs to accelerate in order for the currency to appreciate (core is moving in the right direction, albeit at 1.3% it remains some way from the Riksbank’s comfort level).
Sell USDSEK at 8.7712: Stay short in USDSEK at 8.7712, targeting 8.48 with a stop at 8.90.
Alternatively, you could also use 2M USDSEK 25D ATM put, sell 3M 25D call, eql notionals.
Rationale: The six-year dollar cycle is maturing, and the Riksbank is on the cusp of a policy shift as the deflation threat in Sweden recedes. The Swedish krona has been undervalued as a result of ultra-loose monetary policy amid a strong dollar tide. The closing of the monetary and valuation divergences will drive USDSEK lower.
Risk profiling (Global risk aversion and a more aggressive Fed):
The krona remains a high beta currency that will suffer in times of global market stress. A more aggressive Fed is another risk given that the market has priced out a third Fed hike by year-end.