Economists at Commerzbank analyze the Swedish Krona’s (SEK) outlook following the Riksbank's decision on Thursday, which was a dovish turn.

Riksbank’s decision does not bode well for USD/SEK

In contrast to the US economy, which has surprised on the upside in recent quarters and looks very robust despite the interest rate hikes, the Swedish economy appears to be weakening significantly. It is therefore understandable that the Riksbank wants to give the real economy a boost with the prospect of interest rate cuts in the near future.

Considering the declining inflation until December and the poor economic outlook, as well as the fact that the Riksbank was not an overly hawkish central bank before, the turnaround is not as surprising as I originally thought.

Nevertheless, the decision does not bode well for USD/SEK. For the time being, Krona will have to price in (a) a significantly higher inflation risk premium and (b) a greater growth disadvantage versus the US. Until this situation changes, I believe that no Swedish official should talk about the SEK being fundamentally undervalued for the time being.