If Sweden's central bank cuts its benchmark interest rate next week, as many analysts expect, the move may mark the beginning of the Swedish crown's rally against the euro. By July 3, when the bank discloses its decision, a rational foreign exchange market will probably already have sold Swedish crowns versus the euro, anticipating looser Swedish monetary policy.
If the Riksbank then only matches the expectation of a pre-positioned forex market, there may be a dearth of fresh sellers of crowns against the euro, especially as the central bank seems to have limited room to move further.
In that case, the Swedish currency to drift higher against the euro in the following days as stale positions are unwound.
A combination of subdued inflation and disappointing first-quarter growth data in Sweden has led most analysts to expect the Riksbank to cut its benchmark rate from the current 0.75 percent in July.
Finance Minister Anders Borg may have stopped short of calling for the Riksbank to ease policy but his preference for a rate cut is pretty clear.
The clincher may have been Norway's lowering of its interest rate outlook on Thursday. The Norwegian crown slid in value, including against its Swedish neighbour, and dealers had to scramble to cover positions. Traders may well conclude that Stockholm will follow Oslo, at least this time.
All of this is widely known to market participants. It is already being factored into the value of the Swedish crown.
In contrast, Norway's central bank, the Norges Bank, caught foreign exchange traders by surprise. They had bet heavily the Norwegian crown would strengthen against the euro. Instead, it slid 1.5 percent to two-month low against the euro.
The Riksbank arguably has less room to spring surprises, because it has another problem, again well-known to forex traders: loosening policy further might encourage Swedish households to add to their already heavy burden of debt.
Sweden has a household debt rating of around 174 percent, and "the indebtedness of the Swedish households is currently the greatest domestic risk," the central bank said on June 4.
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