SEK: Fundamentals to drive further weakness – Nomura

EUR/SEK moved 1% lower on news Friday morning that the Swedish National Debt Office will position for a stronger krona against the euro and this short EUR/SEK position could be increased up to SEK 7bn, points out the research team at Nomura.

Key Quotes

“We don’t think this alters the trend in SEK and we remain bearish.”

“Sweden has a lot of foreign currency debt. Of the total SEK1.2trn in central government debt, SEK328bn (31%) is issued in foreign currency. As a result, the Swedish government has a large proportion of its liabilities in EUR and USD, which means when SEK depreciates the size of its foreign currency liabilities increases relative to its assets.”

“The debt office manages these liabilities by purchasing foreign currency at a pace of SEK20bn per year – i.e. buying EUR/SEK. However, the NDO has a mandate to take positions in SEK of up to SEK7.5bn, thereby reducing foreign currency exposure. In line with Riksbank forecasts, the NDO claims to expect SEK to strengthen “eventually” thus buying foreign currency at these levels is deemed unattractive. Therefore, it is building a position of EUR/SEK shorts up to SEK7.5bn to alleviate rising liabilities on the balance sheet.”

“We doubt this position could really move the market

Some back-of-the-envelope calculations can give an idea of how large a SEK7.5bn position is. As a percentage of GDP, the position is just 0.163%. As a percentage of Sweden’s current account surplus, the position size is a non-negligible 5.2%. However, if we assume the position is built up over the next year, this would be equivalent to SEK29mn p/day ($3.3mn). If the position were built up over the next three months, this would be $13mn per day. We do not think flows are large enough to materially alter the trend in SEK.”