Chart of the Day: EURSEK
Sweden’s Riksbank is in the global monetary policy spotlight this week, with expectations it will become the first central bank to start unwinding its negative interest rates setting.
A handful of economies, including Japan and the eurozone, will be watching closely to understand how they too might eventually hike their way out of ultra-loose policy.
Sweden followed the ECB into negative rates, where it took additional cuts and before waiting several years for inflation to pick up. Now that inflation’s back on track to meet the 2% target, it seems negative rates have served their desired stimulatory effect.
EURSEK has weakened ahead of the expected rate hike from -0.25% to 0%, dipping below the 10.488 multi-month support. For 2019, the Swedish krona (SEK) has been the poorest performing G10 currency against the greenback, down 5.37% year-to-date. While this is an incredibly simplistic view, successfully unwinding negative rates could change the currency’s performance for 2020.
Market implied rates are pricing a 17bp increase in SEK interest rates over the next year. What this indicates is that provided Riksbank goes ahead with the expected cut, they will likely signal holding rates for a long time. It seems highly unlikely that the central bank will indicate a hiking cycle, but if they do give the impression it's something they may consider, obviously the SEK will fly.
ECB and BoJ officials will be watching the rate decision closely: if negative rates are successfully unwound, the handful of other economies with ultra-loose policy will begin to understand how they too can hike out of negatives. This could forge a much-needed clearer path towards a stronger euro in 2020.
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