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GBP/SEK 'Attractive Sell' To Below 12.50 Krona Says Nordic Bank SEB

This article is more than 8 years old.

With SEB , the leading Nordic corporate bank, having expected that Sweden’s central bank, the Riksbank, would cut the repo rate by another 10 basis points (0.10%) from a current -0.35% rate earlier this week on Wednesday, currency strategists at SEB recommended GBP/SEK as an "attractive sell" ahead of the decision and forecasted a similar scenario against the euro.

Richard Falkenhäll, Senior Currency strategist at SEB in Stockholm, commenting prior to the Sveriges Riksbank's decision said: “We recommend selling GBP/SEK (at 13.02) targeting levels below 12.50.” If that target were reached it would imply a move of around 4% in the Sterling/Swedish Krona currency pair. The Sterling (GBP) exchange rate against the Krona over the past 12 months ranged from SEK11.52212 in mid November 2014 to 13.59051 early this August.

The Riksbank convened a press conference on Wednesday at 11.00am at Brunkebergstorg 11, Stockholm, on the interest rate decision with Stefan Ingves, Riksbank Governor, and Marianne Nessén, head of the Monetary Policy Department, participating. The press conference was broadcast live on the bank’s website or on the Riksbank's YouTube channel. As it transpired  the Bank surprised the markets.

But what does a negative interest rate mean for the banks? Well, when the repo rate is negative, banks have to pay when they need to deposit money with the Riksbank.

They can either invest money for a whole week by buying Riksbank Certificates or overnight through so-called ‘fine-tuning’ transactions. And, when they purchase these Certificates, the banks have to pay the repo rate – which is -0.35%. For overnight deposits, the banks pay a fine-tuning interest rate that is the repo rate minus 0.10% - i.e. -0.45%.

GBP/SEK ‘Sell’ Recommendation

Ahead of the upcoming Riksbank rate decision and on the back of the ‘dovish’ tone from the European Central Bank (ECB) last week, GBP/SEK had “reached attractive levels to sell” according to SEB’s Falkenhäll, who studied at Uppsala University around 40 miles north of the Swedish capital.

According to Falkenhäll rising inflation will make it possible for the Riksbank to “lower the guard and allow a slightly stronger Krona going forward, although we expect a cut at the upcoming meeting this week.”

He added: “The GBP [Sterling] has reached quite strong levels against the euro at around 0.72, which we think is a stretch in the currency pair. Not the least as comments from the Bank of England (BoE) have softened in recent months.”

In the Minutes from BoE's October Monetary Policy Committee (MPC) meeting the market learned that some of the bank's members, who previously viewed the decision to leave rates unchanged as ‘finely balanced’ no longer do - as the upside risks related to inflation relative to the target have disappeared.

“Moreover some members of the MPC had noted that ‘lags in the response of inflation to interest rate changes appeared a bit shorter than previously thought’,” said Falkenhäll. “This could only mean that the BoE can wait longer until they begin to tighten policy as inflation will react faster when they eventually do [act].”

When GBP/SEK traded well above the ‘13-handle’ in July and August this year, it did so partly because expectations then reflected a potential tightening by the UK’s central bank already before year-end. “However, this is no longer the case which makes current move higher in GBP/SEK an attractive sell,” Falkenhäll argued.

Riksbank’s Repo Rate

Currently the Riksbank’s repo rate stands at -0.35% and has applied since 9 September 2015 after a decision was made by the Bank’s Executive Board on 2 September to hold the rate unchanged.

At the time a statement on the central bank’s website read: “The expansionary monetary policy, with a negative interest rate and the previous decision to purchase government bonds until the end of the year, is supporting the continued positive development of the Swedish economy so that CPIF inflation can be expected to be close to 2% in 2016.”

The Riksbank added that it “remains highly prepared to make monetary policy even more expansionary in the event of inflation prospects deteriorating.”

That said, and while SEB “expectd” a 10bps lowering by the Riksbank of the repo at the Wednesday morning meeting it nevertheless noted that both its own investor survey and the general consensus “think it highly likely that the central bank will leave its monetary policy unchanged.”

Carl Hammer, Chief Currency Strategist at SEB, commenting seperately in an FX Ringside paper (‘ECB is not a short-term positive SEK factor’) on 27 October 2015 (a day prior to the meeting), stated: “Certainly, the bank will maintain an easing bias in its own repo path. Meanwhile, most respondents expect further QE before the end of this year.”

EUR/SEK Rate Forecast

SEB recommended selling EUR/SEK at 9.40 ahead of the Riksbank meeting too and their EUR/SEK forecast to the end of the first quarter of 2016 is 8.85, which would equate to a movement of around 5.85%.

In relation to this currency pair Hammer said at the time in his paper: “We still regard current spot rate (9.40) as good risk reward to re-enter short EUR/SEK. With inflation moving closer to target in Q1 2016 and growth set to continue to be strong next year, we remain very positive towards SEK in the 3-6 month horizon.”

Olle Holmgren, Fixed Income Macro Strategist at SEB, commenting directly after the Riksbank decision, said: “After being on hold in September for the first time this year the board again surprised markets by prolonging the bond purchase programme until the middle of next year.”

He added: “The Riksbank says it will buy another SEK 65 billion of nominal government bonds. Assuming that bond purchases are halted during holidays this implies weekly purchases largely at the current rate, i.e. around SEK 3bn/week.” SEB’s main forecast is that the board of the Riksbank will cut the repo rate to -0.45% in December. Watch this space.