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.