Sweden joined the European Union
in 1995. Even though it is a member of the European Union, the country has its
own central bank and currency. The currency is known as the Swedish Krona. The
country does a lot of business with the European Union. In fact, almost 60% of
all its trade is with the European Union. Exports to the European Union account
to 60% of its exports. Outside of the EU, most of its exports go to Norway and
United States. In addition, 71% of the country’s imports come from the European
Union while 6% of the imports come from China.
In the past one year, the euro
has weakened significantly against the krone. This is because of the divergence
approach to monetary policy from the ECB and Riksbank. In the most recent
meeting, Riksbank left interest rates unchanged and signaled that it could hike
later this year. This is after the bank made a 25-basis point rate hike in the
December meeting. While the rate of inflation remains low, officials believe
that the country can reach the 2% target even with a stronger krona.
The European Central Bank on the
other hand is taking a different route. In the statement that was released
yesterday, the bank said that it was exploring more ways to support the
economy. This was interpreted to mean that the bank will slash interest rates
in the September meeting. While the size of the cut is not yet public,
investors are expecting a 25-basis point cut. The bank also signaled that it
could restart the quantitative easing policy that ended in December this year.
Mario Draghi said that the
stimulus will be necessary because the outlook for the European economy appears
to be moving from worse to worse. He also suggested that governments will need
to adjust fiscal policies to prevent the economy from deterioration. For
example, Germany has one of the biggest budget surpluses in the world and is
not doing much to stem its deteriorating manufacturing sector. In 2018, the
German government had a budget surplus of more than $65 billion and the
country’s debt to GDP is seen dropping to 51% in 2023. This means that Germany
can introduce fiscal stimulus to support the economy.
As shown below, the EUR/SEK rose
after the dovish statement by the ECB. The pair reached a high of 10.55. On the
chart, this price is above the 21-day and 14-day moving averages. The pair
could continue moving higher as demand for euros rise as traders use the carry
trade strategy. This is where they borrow a low-yielding currency to invest in
a high-growing currency.
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