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SEK: Cautious

FOREX_cautious-over-the-near-term-path0307_FXPIG

Today’s Riksbank decision keeps alive hopes that a thin wedge of policy divergence could emerge between the Riksbank and the ECB and in line with this, the FX market has keyed onto the more hawkish elements of the announcement, according to analysts at TD Securities.

Key Quotes

“Looking forward however, we remain cautious over the near term path for SEK. In particular, we would be reluctant to be fresh sellers of EURSEK at current levels without a fresh catalyst.”

“While the Riksbank may have taken a small step down the hawk's path, that step remains laced with caution. For a central bank that has established itself as among the most dovish in the G10 in recent years - at least relative to domestic fundamentals - we think the FX market will be reluctant to run away with the idea of a Q4 rate hike.”

“As a result, we think markets will apply a healthy dose of skepticism to this outcome in the weeks ahead. While the Riksbank has certainly not given the SEK a push to depreciate further, it has also only offered the currency tepid support.”

“We see today's outcome as more of a floor under SEK weakness than an invitation to rally substantially from here. Anything beyond that would be a pleasant surprise. With summer markets now in full swing, our base case calls for EURSEK to take on a more horizontal dimension.”

“Within this, we think the 10.3250 level may become a key pivot within a broader range. This represents the 50% Fibonacci-retracement level of the cross' trading range since the early May highs. Diminished seasonal liquidity could make price discovery somewhat challenging, but initial candidates for the outer boundaries of a near-term range could be 10.2377 (23.6%) and 10.466 (76.4%).”

“Longer-term, we continue to take the Riksbank at their word and look for a Q4 rate hike this year. This keeps us positively inclined to the SEK overall. We continue to target 9.80 for our end-2018 forecast, but this remains contingent on a few key factors.”

“Finally, we think SEK will remain highly sensitive to broader investor confidence given Sweden's high degree of leverage to global trade and overall sentiment. A significant deterioration in risk appetite would suggest we are too optimistic on the SEK overall and have us revise our view on EURSEK higher.”

Today’s Riksbank decision keeps alive hopes that a thin wedge of policy divergence could emerge between the Riksbank and the ECB and in line with this, the FX market has keyed onto the more hawkish elements of the announcement, according to analysts at TD Securities.

Key Quotes

“Looking forward however, we remain cautious over the near term path for SEK. In particular, we would be reluctant to be fresh sellers of EURSEK at current levels without a fresh catalyst.”

“While the Riksbank may have taken a small step down the hawk's path, that step remains laced with caution. For a central bank that has established itself as among the most dovish in the G10 in recent years - at least relative to domestic fundamentals - we think the FX market will be reluctant to run away with the idea of a Q4 rate hike.”

“As a result, we think markets will apply a healthy dose of skepticism to this outcome in the weeks ahead. While the Riksbank has certainly not given the SEK a push to depreciate further, it has also only offered the currency tepid support.”

“We see today's outcome as more of a floor under SEK weakness than an invitation to rally substantially from here. Anything beyond that would be a pleasant surprise. With summer markets now in full swing, our base case calls for EURSEK to take on a more horizontal dimension.”

“Within this, we think the 10.3250 level may become a key pivot within a broader range. This represents the 50% Fibonacci-retracement level of the cross' trading range since the early May highs. Diminished seasonal liquidity could make price discovery somewhat challenging, but initial candidates for the outer boundaries of a near-term range could be 10.2377 (23.6%) and 10.466 (76.4%).”

“Longer-term, we continue to take the Riksbank at their word and look for a Q4 rate hike this year. This keeps us positively inclined to the SEK overall. We continue to target 9.80 for our end-2018 forecast, but this remains contingent on a few key factors.”

“Finally, we think SEK will remain highly sensitive to broader investor confidence given Sweden's high degree of leverage to global trade and overall sentiment. A significant deterioration in risk appetite would suggest we are too optimistic on the SEK overall and have us revise our view on EURSEK higher.”

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