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Riksbank intervention imminent – Deutsche Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 6, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Oliver Harvey, Macro strategist at Deutsche Bank, suggests that yesterday’s announcement that the Riksbank Executive Board has delegated power to Governor Ingves and First Deputy Governor Jochnick to ‘instantly’ intervene in the FX market is a signal that action is imminent.

    Key Quotes

    “Last week, the central bank stated it was ‘highly prepared’ given recent krona appreciation, and after the relatively muted reaction in spot since then today’s press release likely represents a procedural green lighting. On previous occasions when the central bank has intervened (such as in 2001), it occurred the day after this decision to delegate was taken. While we do not see intervention as a medium-term obstacle to krona strength, we think the short-run risk/reward for being long SEK at these levels has dissipated.

    What forms could intervention take?

    The Governor and First Deputy Governor would decide the details, but the Riksbank would most likely begin to buy euros in exchange for krona in the market. This would be accompanied by a press release. The euro makes up nearly 50% of the broad krona KIX TWI and this currency pair was used in previous interventions.

    It is probable that intervention would be ad hoc rather than accompanied by a target or floor; the Riksbank have specified they do not have a currency level in mind, a set floor would be at odds with their forecast of a strengthening krona and would invite speculative attack.

    That being said, it is the broad KIX TWI the Riksbank forecast rather than EUR/SEK and this currently stands 2.1% higher than forecast in the December Monetary Policy Report. Assuming a uniform move, EUR/SEK back at 9.40 would be broadly consistent with their forecast. Again, it is unlikely they would target this level, but rather introduce two-way risk in the currency and slow the appreciation trend. It is unclear whether the Riksbank would choose to sterilize intervention. All things being equal unsterilized intervention would be more bearish SEK by increasing the costs of negative rates. Sterilizing intervention could also raise short-term rates which would be counterproductive.”
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