Feeling a slight sense of déjà vu?
Seven months after a rapid fall in the Swedish krona had analysts suggesting that yield-hungry algorithmic traders had left the currency fundamentally undervalued, the krona is sliding once more, and analysts are again blaming the robots.
The stokkie, as it is affectionately known, slid 1.4 per cent against the euro this week. That is its worst weekly decline since last October, when an unexpectedly dovish update from the central bank pushed the krona to a six-year low. At publication time the currency stood around 9.79 per euro, a five-month low.
The Riksbank has made dovish surprises something of a habit lately, with its recent decision to extend its quantitative easing programme for another six months despite predictions the economy could grow more than 3 per cent this year.
However, there has been little major news out of the bank this week besides changes to its inflation target, which analysts believe do not justify the sell-off.
Rather, the renewed belief that the Riksbank will keep its record-low interest rates for the foreseeable future has allowed the carry trade to once again become a dominant driver.
“Carry is definitely the theme right now, and if you look at surprise indicators the market is fully ignoring the fact that Swedish macro continues to be very strong and inflation/inflation expectations are at the policy target of 2 per cent” said SEB’s chief forex strategist Carl Hammer.
The Riksbank’s repo rate currently stands at -0.5 per cent, encouraging investors to sell krona to fund investments in higher-yielding currencies.
Analysts at Goldman are confident that the krona will outperform its peers over the next 12 months, based on “the strength of domestic demand and an improved outlook for inflation”. But with the Riksbank still actively discouraging a rapid appreciation, they warned that “the key questions are around the timing to engage in long SEK positions”.
Signs of division over monetary easing within the Riksbank helped to end the krona’s last big slide over the winter, sparking a rally of more than 6 per cent between its weakest point in November and February.
Since then, central bank has repeatedly pushed back its forecasts for a rate rise, leaving analysts less certain of what will trigger another rebound.
Mr Hammer remains confident the krona will have to reverse course over the longer-term as there is a limit to how far it can fall. At its weakest, the krona briefly passed 10 per euro, but Mr Hammer said “we never trade [there] unless we have a financial crisis”.