Fundamentals appear in favor of the Swedish krona according to interest rates and bond yields.
One of the major driving factors in the valuation of a currency is interest rates and Sweden enjoys higher yields versus both its European and US counterparts. The Riksbank is forecasted to continue to raise interest rates over the mid-term which should be supportive of the Swedish krona. Currently the repo rate maintained by the Riksbank is 1.75%. The EU interest rate currently stands at 1.25% and is expected to rise 25 bps in the next ECB meeting in July. The US maintains an interest rate below 0.25% and is forecasted to continue its ultra-loose monetary policy.
Strong yield differentials between the Swedish 2-year bond and the 2-year German bund are in Sweden’s favor by 81 bps while Sweden enjoys a 197 bps spread between the equivalent US 2-year Treasury. Currently the Swedish 2-year yields 2.41%.
However, traders should be aware that the 2-year US Treasury note has plummeted since April (bond prices and yields have an inverse relationship) as the yield has risen to 0.44%. As such, traders may look to play the euro versus the Swedish krona rather than the USD.
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