Traders Eye Sweden’s currency as the next in line for Hawkish Boost
(Bloomberg) – Currency strategists are investing in the Swedish Riksbank being able to follow the European Central Bank in a hawkish pivot this week, which provides a much-needed boost for the underperforming krona.
Barclays FX strategists including Wen Yan recommend a long position in Swedish kronor against the euro, while Morgan Stanley’s strategists advocate buying the crown against the Swiss franc. Credit Agricole aims for a key psychological level of SEK 10 per euro.
– A firmer Riksbank should be positive for the krona in the medium term, says Fredrik Repton, portfolio manager at Neuberger Berman. “All sales could be opportunities to add, especially in light of potential fiscal stimulus later in the year.”
Such a change may prove to be a game changer for the risk-sensitive krona, affected by the rise of the Federal Reserve since the end of 2021 and when tensions increase around Ukraine. The Nordic currency has also closely followed the stock markets, with the krona reaching its weakest levels against the dollar since June 2020 as the outlook for further monetary tightening rolled equities in January.
A more positive sentiment for the krona can also be seen in the options market. While currency traders have been looking to buy the euro against the Swiss franc, the pound and the dollar after the ECB meeting, the effect does not seem to extend to the Swedish currency.
Option traders Buy Euro Topside After ECB Except against Krona
The focus on the Riksbank is part of a broader market review of silent pigeon central banks. After the ECB changed its tone last week, forex traders are preparing bets on which central bank will be next to lean against monetary tightening.
Money market traders are investing in almost two full interest rate hikes from the Riksbank at the end of the year, according to an analysis from SEB. The Riksbank’s decision-makers, on the other hand, do not see an increase in the policy rate until the end of 2024.
– Given the small size of the Swedish economy, it may be easier for the Riksbank to follow than leaders when it comes to monetary policy movements, says Jane Foley, head of currency strategy at Rabobank, who sees a certain potential for a boost. to the crown. “Last week’s move increases the probability that the Riksbank will present the potential for an adjustment of interest rates.”
The argument for a more hawkish Riksbank is also due to a tighter labor market and more positive economic prospects, where the Nordic economy grew more than expected in the last quarter of last year. The country’s inflation rate reached a 28-year high in December, with energy as an important component.
Inflationary pressures in Sweden are still “more subdued” than in other countries, which puts less pressure on the Riksbank to tighten policy, according to HSBC’s head of European currency research Dominic Bunning. The central bank’s current faster pace of foreign exchange purchases may also weigh on the krona, he added.
Every hawkish pivot should also do little more than create a “knee-jerk” response from the crown on its own, said Vanda Research’s global macro strategist Viraj Patel.
“There is a bit of a permanent upside that the Riksbank can supply the Swedish krona, given that it is highly unlikely that the Swedish central bank will deliver as much austerity as what is priced in the markets,” he said, adding that a “constructive risk environment” would be a stronger driving force for the krona.
Patel is bullish on US equities and recommends that traders position themselves for the krona against the British pound and the US dollar in the medium term. These currencies should perform worse in a risk market and have the most to lose when pigeon central banks such as the Riksbank “join the hawkish party”, he said.
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