SEK: juggling priorities - ING

Rob Carnell, Chief International Economist at ING suggested that there is more QE needed to prevent abrupt SEK strength.

Key Quotes:

"If this were a simple one country model, the Riksbank would not only have a more normal monetary policy setting currently, it would probably also be tightening rates. Inflation is rising and economic activity is solid.

But this is not the current reality, and the Riksbank is still driven by reaction to external policy setting, in particular the ECB, and the consequent impact this has on the value of its currency and external competitiveness.

The risk of abrupt SEK strength should the Riksbank decide not to ease monetary policy further tomorrow is likely to be the main impetus behind further easing. We look for an extension of QE, rather than further rate cuts.

We estimate SEK110bn (over 2H16) is needed to fully offset the ECB’s topped up QE. However, improving Swedish data and the precedence of an insufficient QE extension in 1H16 point to a lower number.

We look for SEK65bn QE extension over the next two quarters. SEK65bn should be a compromise between those arguing that fundamentally there is no need to ease policy and those that see some additional easing as necessary to prevent sharp SEK strengthening.

We doubt that the QE extension will cause a major EUR/SEK rebound given (a) it is likely to be ineffective in size, and (b) the experience of 2016 whereby currencies did not weaken when their respective central banks decided to ease monetary policy further.

Rather, we continue to expect an ongoing and gradual EUR/SEK depreciation. We look for EUR/SEK to move below the 9.00 level by year end, at the latest. Hence, continue fading any spike in EUR/SEK."