SEK Sliding Away

One underrated victim of the march of the euro off of near-parity EURUSD over the last couple of years has been the humble Swedish krona. While EURCHF, EURGBP, and the various CEE crosses linked to EUR tend to get more attention, the move in EURSEK has been quite something.

Unfortunately for punters, that move has helped disconnect EURSEK from a variety of indicators that have proven quite helpful in the post-crisis environment. A primary example would be the relative size of the ECB and Riksbank's balance sheets respectively. As shown below, you could have done much worse than simply track the relative sizes of the balance sheets from around 2010 to 2016 if you were going to estimate what would happen to EURSEK. Since then (and really, since the euro took off more broadly), the correlation has completely flipped.

Another way to look at things would be to compare the relative interest rates of the two currencies. While benchmark Eurozone rates have risen somewhat relative to their Swedish equivalents, they would imply a much lower EURSEK rate and a significant SEK rally from here.

Of course, the long end might be the wrong place to look for interest rate differential drivers. But the short rate differential isn't exactly cooperating either. Relative 1y forward 1y rates worked very well as a fair value for EURSEK from 2008 through 2014 but EURSEK then undershot and has now overshot. In any event, EUR 1y1y rates less SEK 1y1y rates are at multi-year lows while EURSEK is near the highest levels since the crisis.

With the traditional market reference points no help, a search for explanations means a trip further afield into a data dive. Relative international position may be helpful. During the crisis, EUR surged, but as it worked off that crisis dislocation the Eurozone current account surplus persistently increased relative to that of Sweden's. As the Swedish current account advantage worked itself off, EURSEK headed persistently higher. Economic theory would generally suggest the opposite should happen: current account surpluses rising should lead to depreciation rather than appreciation. 

Of course, using total-economy aggregates can be deceptive, so we'll also take a look at the bilateral trade surplus. That story is a very one-way street: Eurozone trade surpluses have risen steadily and in-line with current account surpluses for almost two decades. Over the past 5 years or so, that appears to have been a significant driver of EUR appreciation relative to SEK.

Finally, taking a step back to the broader picture, the SEK REER has persistently weakened as its current account has deteriorated. For now, the direction of travel in the Swedish surplus seems a highly relevant factor in the decline in SEK on a broader basis.

As a final stop on our tour de krona, the Riksbank. While inflation has picked up a bit and target measure CPIF is reliably printing in the 2% YoY range, much of that is energy with CPIF ex Energy around 1.5%. Unemployment has been falling steadily and continues to trend lower, sitting around 6% versus prior cycle lows of around 5.5%. The output gap is trending slowly tighter and sits around 65 bps of GDP per OECD and IMF estimates. Finally, industrial output is steady around 90-91% of capacity. All of this gives the Riksbank as much latitude as it wants to keep kicking the can. In short, don't look to the Sveriges Riksbank as a catalyst for stronger SEK.

To close things out, what we can say about SEK is that its trend, economic data, and central bank's tendencies are for a weaker krona. On the other hand, the EUR's strength has been especially dramatic versus SEK given how closely the two economies are linked. That suggests that EURSEK would be an attractive portfolio overlay for a set of trades which benefit from a broadly stronger EUR if not as an outright long or short in its own right.