Household debt another reason to prefer SEK shorts In September we argued that the krona should weaken due to strong and persistent disinflationary pressures imported from abroad. Another factor that probably does not get the attention it deserves is the leverage of Swedis households. In the medium to long term, we think this will keep the krona under pressure.
The Riksbank will have to tread carefully, even in a strong growth environment
UBS Economics forecast higher – than – consensus euro area growth of 1.8% in 2016. However, inflation is likely to remain subdued, with probable knock – on effects on Sweden. But even when Swedish inflationary pressures eventually start to build, the aggregate borrowing of Swedish ho useholds indicates that the impact of monetary tightening on overall economic conditions would be significantly higher than in many other developed economies. Put simply, the Riksbank’s current accommodative policy stance could lead to looser – not tighter – monetary policy in the medium term.
If the economy weakens, Sweden appears relatively vulnerable
Household borrowing also presents a real risk that the Riksbank will not be able to get rates up meaningfully before the next economic downturn. This increases the likelihood for more unconventional policy tools, such as outright FX intervention.
We outline three risks to our view
We acknowledge that our case for a weaker SEK is facing scrutiny in light of recent constructive data releases. The main risk to our call is a continuation of this trend, especially with regards to inflation. However, considering the Riksbank’s assumptions for euro area HICP in the age of global disinflation , we find its domestic inflation forecast somewhat optimistic. Secondly, we do not think the Riksbank is ready to use monetary policy to tackle hou sing risks at this juncture. Finally, while the humanitarian situation could be a boost to aggregate demand and warrant higher 5y5y rates, its near – term impact on monetary policy and the currency is uncertain