The Riksbank has been successful in keeping SEK appreciation at bay. However, continued muted inflation pressure and a rising media storm, also from an unexpected side, raise the question of how effective this really is. In this piece we discuss the recent SEK sell-off as well as the recent years' trend depreciation; its causes and how we assess the outlook for the SEK. We argue that the Riksbank, in relation to other central banks, is the main, albeit not sole, driver.
The background is that the SEK has lost 50% of its value vs the USD since 2014. Against the EUR the loss is 22% over the same period and 31% from the trough. Mr Ingves tried to avoid blame by pinpointing other currencies (NOK, NZD, AUD, CAD) that have weakened sharply vs the USD. The depreciation of these currencies is related to the oil price, though, not least the collapse from USD110 to USD30 per barrel. We believe it is hard to escape the fact that the sell-off in the SEK is highly correlated to the Riksbank's (1) negative rates, (2) significant bond purchases and (3) verbal FX interventions.
So, mission accomplished? Yes, in terms of weakening the SEK. No, because that is the ultimate goal, but only one of the means. The goal to get inflation to 2% has only partially succeeded and probably only temporarily unless underlying cost pressure start to pick up. We look forward to the re-take on the FX analysis that is requested by Mr Ingves in the Minutes. If we are allowed to guess, they will conclude that fundamentals have changed too and thus the Riksbank is not the only one to blame. Maybe they will end up with a less aggressive KIX forecast . Of course that could have market impact: "not even the central bank believes in its currency". But why should the market care about the KIX forecast: it has lacked credibility for so long.
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