Closing our short SEK trade to capitalise on the Scandi FX sell-off

As we head into the summer recess where central bank meetings are few and far between, we capitalise on seasonal illiquidity and the extraordinary sell-off in Scandinavian FX by closing out our long EURSEK trade, opened in May. Our view was primarily driven by our more aggressive rate forecast than the consensus. As of today, however, the market has moved in our direction.

What you will learn:

• We expected a bout of SEK weakness following the Riksbank rate cut in the spring, but we think the recent sell-off is overdone, and we close our long EURSEK trade, opened in May.
• With the worst now behind us, we now think rates are unlikely to re-price lower. We are less sanguine than the market’s expected 150 bps of cuts over the next year – the steepest cutting cycle in G10, bar New Zealand – and we remain underweight Swedish bonds in our fixed income allocations.
• Our FX scorecard does not show a low ranking for SEK, based on valuation drivers in particular, and we think it opportune to close our short SEK position for a modest profit.