US Dollar to Swedish Krona Rate: Sell USD/SEK at 10.98 target of 10.65, say MUFG

November 6, 2023 - Written by James Fuller

STORY LINK US Dollar to Swedish Krona Rate: Sell USD/SEK at 10.98 target of 10.65, say MUFG

FX analysts at MUFG sees scope for at least limited krone relief, especially with the central bank continuing operations to sell foreign currencies to hedge foreign exchange reserves.

The bank is also more cautious over the dollar outlook.

According to the bank; “With the USD in the process of peaking out alongside US yields, conditions are falling into place for at least a relief rally for the SEK.”

In this context, it sees scope for the Dollar to Krona (USD/SEK) exchange rate to weaken to 10.65.

Danske Bank does expect USD/SEK to trade around 10.75 on a 3-month view, but does not see krona gains as sustainable. It forecasts USD/SEK gains to 11.04 on a 6-month view and 11.46 on a 12-month basis.

There has also been a sharp recovery in global risk appetite. Given the krona sensitivity to risk conditions, any sustained improvement in risk appetite would be significant in underpinning the Swedish currency.

From highs at 11.23 last week, USD/SEK posted sharp losses to 10.87 on Monday.

The latest data reported that the Riksbank has sold USD2.2bn and EUR195bn up to the week starting 16th October since the program started on 25th September.

MUFG notes that in total the Riskbank is planning USD8bn and EUR2bn of sales in exchange for the krona.

Danske Bank does not see the hedging as a long-term solution; “we see this as a transitory effect unless other investors follow suit. With structural and cyclical, including monetary policy, headwinds still in place we foresee no major turnaround in the SEK over the medium term.”

According to Rabobank; “Given the risk that SEK purchases will coincide with further rate hikes from the Riksbank, the SEK should find some support.”

It expects strong EUR/SEK resistance on approach to 12.00 with scope for a retreat to 11.40 on a 3-month view.

ING considers that the hedging programme will provide relative krona support, but not absolute support; “we think SEK remains vulnerable along with other procyclical currencies – even if the Riksbank FX hedging places it in a slightly more shielded spot than others.”

The Riksbank interest rate policies will also be a key element for currency markets.

ING notes that the Riksbank has a difficult balancing act of bringing inflation under control and bolstering the krona without putting the economy into a deeper economic downturn.

In essence, rate hikes would support the currency, but increase the risk of recession.

Overall, it expects the bank will adopt a hawkish stance; “For now, we’d expect the Riksbank to prioritise the currency over a weakening labour market and economic backdrop.”

ING expects a full-scale krona recovery will be delayed; “We still see another hike by the Riksbank as a necessary step to take the krona back on a re-appreciating path, that we expect to materialise in full in the second half of 2024 once risk sentiment improves on the back of Fed cuts.”

Danske is also still concerned over global geo-political tensions with a focus on the Middle East. It also considers that the rally in US Treasuries may not be sustainable with the threat of renewed upward pressure on the dollar.

It adds; “We deem it unlikely that a resolution is reached between Hamas and Israel in the near term. This alongside any further gains in US yields could have adverse effects on risk and global growth prospects and by extension pose an upside risk to EUR/SEK.”

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