The Swedish krona unimpressed with a jumbo Riksbank hike (Daily analysis 20.09.2022)

Exchange rates at the kick-off of a marathon of rises. The EUR/PLN sticks above 4.70, the euro is worth more than the dollar again, and the Swedish krona reacts to the sharp move.

In the first part of the week, global market indexes are attempting to bounce back after a sharp discount, and the dollar is slightly depreciating. The reshuffle is part of investors' preparation for Wednesday's Fed decision and, in this context, may prove unsustainable. The EUR/USD is rising above parity, and the dollar, the franc and the pound are awaiting moves by central banks. The Fed, the Bank of England and the Swiss National Bank may unanimously raise rates by 75 basis points this week. A foretaste before the series of key decisions was an aggressive full percentage point hike by the Swedish Riksbank, which only momentarily gave respite to the weak Swedish krona.

Swedish krona: sharp rises may not be enough to rally the SEK

In June, the Swedish monetary authorities raised interest rates by half a percentage point to 0.75%. They also presented a scenario of the cycle ending in the first half of next year at around 2%. Since then, inflation has accelerated more sharply than forecast and has spread widely throughout the economy. CPI dynamics are the highest in three decades at 9% year-on-year. At the same time, the labour market is rushed, and collective wage bargaining will have the effect of freezing relatively high wage dynamics for three years.

As a result, the Riksbank decided at today's meeting to move aggressively by as much as a full percentage point. A decisive tightening is expected at the November meeting, and the finalisation of the tightening is not expected to take place with the main rate hike below 2.5%. The decisive move could be partly due to the desire to accumulate rate hikes due to the macroeconomic situation and the calendar of meetings. Today is already the second-to-last one this year, and, for whatever reason, remaining in the tail of the rate would also be detrimental from the perspective of the perception of the already under pressure Swedish krona.

Alongside GBP and JPY, the SEK is among the weakest of the main currencies, having lost as much as 16% against the dollar. The EUR/SEK was above 10.80 before today's decision, which is at its peak from the beginning of the quarter and just less than 1% below this year's highs. The more aggressive tightening by the Riksbank only momentarily gave impetus to the rebound and does not necessarily mean that the SEK's condition on the broader horizon will improve dramatically. Indeed, the Swedish currency is among the most sensitive to fluctuations in global investment sentiment and the most strongly linked to perceptions of the euro area, which is particularly threatened by the energy crisis and a deep recession. Due to its record household debt-to-income ratio, the Scandinavian economy may also be one of the most sensitive to interest rate rises, which will hit the property market hard. More aggressive tightening now means a greater risk of a sharp downturn in the following quarters. And this is at a time when investors may be shifting from tracking relative interest rate paths to analysing the sustainability of national economic growth.