The speculation that the Riksbank is actively seeking a floor for SEK may be read as a positive factor for SEK at face value. However, with almost a fourth of USD reserves ammunition (under the hedging programme) depleted by the second week, there is a tangible risk that speculators will start to doubt the ability of the Riksbank to effectively counter further selling pressure on SEK. While it’s true that EUR sales were minimal in the first two weeks, we must remember that some of the EUR sales will be conducted via the exchange of EU payments, and may have a smaller FX impact compared to the direct swap operations carried out in the USD/SEK.
For now, we continue to think that SEK requires an improvement in risk sentiment and a decisive turn lower in the dollar (thanks to weaker US data) to enter an appreciating path and start to sustainably converge towards its much higher medium-term fair value. Until that happens, the Riksbank can keep EUR/SEK capped at 11.65-11.70 via hedging operations, although it may have to accept higher levels, especially if geopolitical tensions put additional pressures on high-beta currencies.
- ING FX Strategy
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