UBS provided analysis of the Swedish krona’s performance, indicating a weakening position against the euro since May, when the pair returned to levels seen a year earlier despite the Riksbank’s efforts to strengthen the currency last September.
The bank forecasts that EUR/SEK could rise in the near term due to uncertainty surrounding the easing cycle, but expects a medium-term decline as risk appetite rises and high-beta currencies become more attractive.
On the investment outlook, UBS expects lower inflation and rate cuts to provide some support to the Swedish krona, although the volatility of Nordic currencies is generally higher than in other regions. This gives euro investors the opportunity to sell Euro/Swedish krona growth risks from 11.80 to increase profitability.
UBS warns that Euro/Swedish krona could test levels close to 12.0 in the near future if the Riksbank proves more accommodative compared to its peers. Conversely, if the Fed signals a rate cut is imminent, the Swedish krona could rise quickly, potentially Euro/Swedish krona up to 11.0.
The bank also highlights that a sudden shift towards risk-off due to deteriorating global growth prospects could push the EURSEK closer to 12.0, while strong global growth could lead to 11.0.
The upcoming easing cycles from the Federal Reserve and European Central Bank are expected to increase risk appetite, potentially benefiting the krona. UBS suggests that as the attractiveness of investing in safer and more liquid assets wanes, the krona is likely to strengthen against the euro.
Anticipation of an ECB rate cut starting in June, coupled with anticipation of an initial Fed rate cut, is keeping risk markets on edge.
Improved global growth and positive developments in the eurozone are forecast to create a favorable environment for the Swedish currency. Sweden, which has been in recession for the past 18 months, is showing signs of economic recovery, but these have not yet shown up in hard data.
The Riksbank, which already began an easing cycle on May 8, is expected to make two further rate cuts in 2024, offering some relief to Sweden’s highly leveraged economy.
However, UBS notes that the timing of this rate cut is uncertain as factors such as the US election, sluggish global growth and geopolitical tensions pose potential risks that could negatively impact the krona and cast doubt on the outlook for a lower currency. Euro/Swedish krona.
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