Sweden’s strong fundamentals versus a reactive central bank

Data this week will likely confirm Sweden's solid domestic fundamentals with the Economic Tendency Survey (Wednesday) and retail sales (Friday) being the market's main focus. Expectations are for a further increase in the headline ETS index (consensus: 108.5, previous: 108.3) and a 0.6% m/m gain in headline retail sales. 

Indeed, the ETS index has been steadily increasing recently with recent reports pointing towards improved business and consumer sentiment. Despite the high conviction on the domestic outlook, imminent ECB easing will likely cause the Riksbank to react at its December meeting and expect a 10bp cut in the repo rate. 

"Given market pricing of close to a 50% chance of a December cut, we see some upside risks to EURSEK but expect rallies to be short-lived, as the SEK remains a top medium-term pick, given strong economic fundamentals and currency undervaluation. We forecast modest EURSEK depreciation and expect the pair to depreciate to 8.80 by Q4 2016", notes Barclays.