UBS provided an analysis of the Swedish krona's performance, suggesting a weakening position against the euro since May, with the pair returning to levels seen the previous year, despite the Riksbank's efforts to support the currency last September.
The bank expects the EUR/SEK pair to rise in the near term due to uncertainties surrounding the easing cycle, but expects a decline in the medium term as risk appetite increases and currencies with high betas become more attractive.
Regarding investment prospects, UBS expects lower inflation and lower interest rates to provide some support to the Swedish krona, although volatility in Nordic currencies is generally higher than in other regions. This represents an opportunity for Euro investors to sell Euro/Swedish Krona Upside risk from 11.80 to yield recovery.
UBS warns that Euro/Swedish Krona It could test levels near 12.0 in the near term if the Riksbank looks more pessimistic compared to its peers. Conversely, if the Fed signals further impending interest rate cuts, the value of the Swedish krona could rise rapidly, which could lead to higher interest rates. Euro/Swedish Krona Down to 11.0.
The bank also highlights that a sudden shift towards risk-off sentiment due to deteriorating global growth outlook could push EURSEK closer to 12.0, while strong global growth could push it to 11.0.
Upcoming easing cycles from the Fed and the European Central Bank are expected to boost risk appetite, which could benefit the krona. UBS notes that as the attractiveness of safer, more liquid assets declines, the krona is likely to gain strength against the euro.
The expectation of a rate cut by the European Central Bank starting in June, coupled with the expectation of an initial rate cut by the Federal Reserve, has kept risk markets on alert.
The improvement in global growth and positive developments in the Eurozone are expected to create a favorable environment for the Swedish currency. Sweden, which has been in recession for the past 18 months, is showing signs of economic recovery, but these have not yet shown up in concrete data.
The Riksbank, which already began its easing cycle on May 8, is expected to make two additional interest rate cuts in 2024, providing some relief to Sweden's highly leveraged economy.
However, UBS notes that the timing of these interest rate cuts is uncertain, with factors such as the US election, weak global growth, and geopolitical tensions posing potential risks that could negatively impact the krona and challenge expectations for lower interest rates. Euro/Swedish Krona.
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