EUR/SEK still a ‘sell on rallies’ – Danske Bank

Mikael Milhoj, Senior Analyst at Danske Bank, believes the Swedish Krona could gather extra traction in the next months.

Key Quotes

“After testing 9.60, EUR/SEK has grinded lower again, despite the Riksbank Minutes being slightly on the soft side. This is an indication that the previous 15 figures rally also reflected ‘must-do flows’ and was driven not only by dovish Riksbank comments”.

“We think the Riksbank will use the April meeting to signal an end to the bond-buying programme after June and we do not expect the repo rate to be cut further”.

“However, the first hike remains distant – in our view, well into 2018. Pricing according to RIBA at 22bp of hikes by next summer is not much to fuss about. The end-QE signal could push long rates and the SEK higher”.

“To mitigate the ‘risk’ that EUR/SEK falls too fast, it could choose to signal slower hikes and/or keep the current easing bias for longer (beyond April 2018)”.

“As long as the move lower in EUR/SEK (KIX index) is ‘gradual’, which we think it will be, it is likely to be accepted by the Riksbank. KIX is currently trading 1.5% weaker than its forecast. A simple transformation suggests that if EUR/SEK falls back to 9.40, KIX would trade on the Riksbank path, which then projects a 0.5% appreciation per quarter. Hence, we still think that EUR/SEK is sell on rallies”