Upside bias for EURSEK after Riksbank meeting?

By Giles Coghlan, Chief Currency Analyst at HYCM

Riksbank decision favours SEK weakness

Yesterday’s Riksbank decision opens up the potential for more SEK weakness going forward. The key takeaways from their decision are as follows:

1. QE purchases are increased to SEK500B from SEK300B. Remember that QE weakens a currency so that in itself gives a reason for SEK weakness going forward.
2. The Riksbank is prepared to cut rates if seen as effective. Here is the extract from the release, ‘The Riksbank is prepared to continue to use the tools at its disposal to provide support to the economy and inflation. The repo rate can also be cut, if this is assessed to be an effective measure’.
3. This means that the Riksbank is prepared to cut rates back into negative territory if it deems it appropriate.

Now the SEK has seen a recovery against the EUR in the last few weeks, but this reopens the potential case for EURSEK bulls. The technical picture shows a key place where bulls might join EURSEK long and limit their risk in case the outlook goes against them. The bullish case is that it is reasonable to expect more prolonged SEK weakness now the Riksbank has shown a bearish hand.

ING, however, are not convinced on further EURSEK upside and see the pair trading at 10.00 by year-end. Here is their take on the decision:

‘We don’t see today’s decision as a game-changer for Sweden’s krona, and so far the impact on the currency has been fairly limited. The bar for a rate cut is high, the extension of QE is not a complete surprise (the timing of the decision maybe, but not the extension itself) and the prime driver of SEK should continue to be the general risk environment, which we expect be constructive in the second half of the year.’

However, the EUR part of the trade has reason fro strength. Europe has falling COVID-19 cases and a huge spending PEPP programme of over €1 trillion. Furthermore, it also has a proposed Recovery Fund to support the most struggling EU members like Italy. This should keep the EUR supported in the medium term and provide support for EURSEK upside. As long as favourable divergences remain between the EUR and the SEK near term risk can be managed below 200DEMA and ascending trendline targeting most recent swing highs.

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