SEK sell-off and bond market rally have further to run

The recent sell-off in the Swedish krona to decade lows against the euro has been driven by a combination of a flare-up in global trade tensions and a dovish shift in the Riksbank’s policy stance. We think that things are likely to get worse before they get better, and now forecast the currency to fall to SEK11.0/euro by end-2019 (from 10.75 at present). As is often the case, the Norwegian krone has been caught in the crossfire, while the Swiss franc has risen as safe haven demand has picked up. We expect both currencies to rise against the euro this year as investors’ focus turns towards Norway’s widening interest rate differential with the euro-zone in the case of the NOK, and a rise in investor risk aversion boosts the CHF. Meanwhile, Swiss and Swedish 10-year government bond yields have trended downwards in line with German bunds in recent weeks, which has taken them back to levels last seen in late March and closer to our year-end forecasts of -0.5% and 0.0% respectively. By contrast, given the divergence in monetary policy, we expect Norwegian bonds to finish the year broadly in line with their current level.