Watching the ECB and The Riksbank on 'Scandies' - BTMU

Analysts at Bank of Tokyo Mitsubishi explained that both the Norwegian krone and Swedish krona are now undervalued creating more scope for upside.

Key Quotes:

"According to our long-term valuation model estimates, the Swedish krona is one of the most undervalued G10 currencies. The Riksbank’s aggressive monetary policy easing has weighed heavily on the krona extending its decline on a trade-weighted basis to between 15% and 20% since the beginning of 2013. Krona weakness now appears excessive relative to Sweden’s economic fundamentals.

We expect the krona to rebound sharply as the Riksbank reverses its loose monetary policy stance. It has already started to gradually taper QE in the second half of this year reducing the amount of purchases to SEK45 billion.

The Riksbank is wary that the krona could strengthen sharply and is waiting for the ECB’s upcoming policy announcement before deciding how to update their QE programme. If the ECB extends QE as we expect per above, it is likely to prompt the Riksbank to remain cautious over tightening monetary policy too quickly. As a result we expect the Riksbank to continue tapering QE only gradually by extending purchases through the first half of next year at a slower pace of around SEK35 billion.

The Riksbank’s loose monetary policy appears increasingly inappropriate as downside risks to inflation have eased and negative side effects from rising household debt continue to build. The Riksbank is too pessimistic expecting more modest growth of 2% and core inflation of 1.6% in 2017. The krona should strengthen as growth and inflation surprise to the upside in the year ahead."