SEK: Riksbank's Impact on the Krona

SEK: Riksbank propping krona ?

The Swedish krona has been a big outlier since the start of the week, strengthening for two consecutive sessions while all other G10 currencies fell against the dollar. While the positive developments on the SBB saga have likely helped compress the EUR/SEK risk premium, that seems insufficient to justify such outperformance, especially considering the krona’s high beta to risk sentiment, which has been soft.

It appears instead that the Riksbank’s start of hedging operations is having a substantial impact on the market. For context, the Riksbank announced last Thursday that it would hedge part (USD 8 billion and EUR 2 billion) of its FX reserves in a risk-management move aimed at reducing losses in the event of a krona appreciation. Unlike other measures of this kind, the Bank did not release a schedule for purchases but only said that the operations would take four to six months, the sales “will be adjusted to market conditions to avoid counteracting the Riksbank's objectives” and weekly sales data will be published with a two-week delay.

We saw two sharp drops in USD/SEK and EUR/SEK in the past two sessions shortly after 1000 BST in Monday’s and Tuesday’s session. We’ll be on the lookout today for a similar move around that time today, as that may be a signal that the Riksbank is conducting its daily sales operations around that morning timeslot.

The Riksbank stressed this is not FX intervention or a monetary policy tool but mere risk management. The lack of transparency around the amount of weekly sales means the Bank can sell larger amounts at higher USD/SEK and EUR/SEK levels and then justify this as a mere loss-minimisation approach (buying more SEK when it is cheaper).

For now, it seems like the wanted or unwanted beneficiary effect on SEK is working. We still point at some upside risks in the near term for USD/SEK and EUR/SEK, especially once markets adjust to the Riksbank being present in the FX market, although now there is definitely value in holding SEK against other high beta pro-cyclical currencies like NOK.