Meeting minutes from the last monetary policy meeting for the Riksbank shows the Executive Board is ready tighten interest rates further should inflationary pressures fail to subside. This would likely lead to gains in the Swedish krona but the SEK remains pressured due to events in Europe.
The Swedish central bank indicated it would stand ready to tighten interest rates again should inflation expectations fail to dissipate and if wages continue to rise. The Riskbank increased the repo rate by 25 bps at its last policy meeting on the 4th of July and the repo rate now stands at 2%. Investors have priced in another two interest rate increases for later this year given the market’s implied forward rate.
However, Sweden’s central bankers did leave themselves an out of the latest tightening cycle of Sweden’s monetary policy as an easing of the interest rate may be necessary given the slowing of the US economic recovery. A deterioration of public finances in Europe is also a risk for the Swedish economy. Liquidity for Swedish banks has noticeably tightened in markets for the krona, euro, and US dollar.
A positive note for the Swedish financial system came from the European banking stress tests which were released last Friday. The examination showed the Swedish banks of Nordea, Handelsbanken, SEB, and Swedbank all passed with Teir One capital above the 5% requirement as administered by the European Banking Authority.
While rising interest rates are typically a catalyst for a currency the Swedish krona is susceptible to a downturn in risk sentiment. This type of price action is predominant in the EUR/SEK with the pair rising amid market tensions over the European debt crisis and falling with the “risk-on” trade. Initial resistance at 9.2700 has held the most recent move higher but a break above this level would likely take the pair to the October and November highs near 9.4260. To the downside the July low at 9.0540 is the next pivot lower.
Read more forex trading news on our forex blog.
