Sweden: Probability of a rate cut rises – Danske Bank

Compressions of yield spreads on back of the Fed’s and BoC’s 50bp reduction of their policy rates amid heightened FX volatility pose continued headwind for carry-related short SEK positions, as analysts at Danske Bank note. USD/SEK is trading at 9.477 while EUR/SEK is sitting at 10.54.

Key quotes

“After the recent selloff in USD/SEK the cross recovered a bit yesterday. From a Swedish perspective, the coronavirus will take its toll on activity and an already bleak outlook (yesterday the government lowered its growth estimates). It will not be reflected in the production data today, though.” 

“At the same time, it raises the probability for a Riksbank rate cut in our opinion. If the Riksbank would go back into negative territory, the SEK is likely to take a hit and EUR/SEK to go higher. Especially since a cut is not anticipated by, at least, the Nordic FX community.” 

“According to our client survey, Danske Bank’s FX Thermometer, a clear minority of the respondents sees a rate cut as the first line of defence.”