The Swedish krona has been an outlier since the start of the week, strengthening for two consecutive sessions while all other G10 currencies fell against the dollar. While positive developments in the SBB saga have likely helped compress the EUR/SEK risk premium, that seems insufficient to justify such outperformance, especially considering the krona’s high beta to risk sentiment, which has been weak.
On the contrary, it appears that the initiation of hedging operations by the Riksbank is having a substantial impact on the market. To put it in context, the Riksbank Announced last Thursday that it would cover part (8 billion dollars and 2 billion euros) of its foreign exchange reserves in a risk management measure aimed at reducing losses in the event of an appreciation of the crown. Unlike other measures of this type, the Bank did not publish a purchasing calendar and simply said that operations would last between four and six months, sales “will be adjusted to market conditions so as not to counteract the Riksbank’s objectives.” and weekly sales data will be published. It will be published with a delay of two weeks.
We saw two sharp declines in USD/SEK and EUR/SEK in the last two sessions, shortly after 1000 BST on Monday and Tuesday sessions. Today we will be watching for a similar movement at that time, as it could be a sign that the Riksbank is conducting its daily sales operations around that time in the morning.
The Riksbank stressed that this is neither a currency intervention nor a monetary policy tool, but merely risk management. The lack of transparency around the amount of weekly sales means that the Bank can sell larger amounts at higher USD/SEK and EUR/SEK levels and then justify this as a mere loss minimization approach (buying more SEK when it is cheaper).
For now, it appears that the intended or unintended beneficiary effect on SEK is working. We continue to flag some near-term bullish risks to USD/SEK and EUR/SEK, especially once markets adjust to the Riksbank’s presence in the FX market, although there is definitely value in holding SEK against other pro-cyclical stocks now. high beta. currencies like NOK.