Is FX intervention next for Riksbank?

In the time since the Riksbank delivered a significant expansion of QE at their October meeting, SEK is effectively unchanged on a trade weighted basis and EUR/SEK is in fact lower. This has taken place despite a consistently dovish tone from the Riksbank board and, of late, repeated allusions to the possibility of direct FX intervention to counter sharp SEK strength.

SEK has remained a tug of war between positive developments in the Swedish economy and Riksbank and ECB policy throughout the year, particularly since the ECB announced QE, and the year looks likely to end much as it began. The ECB is preparing to reload its policy weapons in December, and the Riksbank will likely counter with another small rate cut of 10-15bp, contingent of course on the form of the new ECB package and the reaction in FX.

Economists see less urgency for the Riksbank to maintain the level of aggressive policy response that has characterized this past year. With the Swedish economy performing well, supported by accommodative policy and also benefiting from a pickup in the Eurozone-Sweden's main trading partner-it will become prudent to reduce the intensity of accommodation. Tightening remains well in the future, but a less proactive policy stance should allow SEK to appreciate gradually vs EUR, in line with forecasts and consistent with the Riksbank's own expectations.

"SEK remains a key focus for the Central Bank, however, so sharp appreciation will not be welcomed. On the topic of intervention, while we do not rule out intervention to smooth sharp SEK appreciation, we do not expect sustained intervention or an SNB-style peg", says BofA Merrill Lynch.