The krona has fallen by over 60 öre against the dollar since the end of September. This is unusually much in such a short time. And if you follow the exchange rate day by day, you can see a pattern, according to Peder Beck-Friis.
The Swedish currency has lost ground against the dollar as the market has tried to position itself for a Donald Trump victory in Tuesday's presidential election in the USA.
The Swedish currency has taken a beating
And when there have been signs of headwind for Trump in the polls, the krona has turned upwards.
In summary, the Swedish currency has taken a real beating in recent times.
The market has priced in a higher probability of Trump winning the election, says Beck-Friis.
The dollar's rise – and the krona's weakness – is linked to the tax cuts, mass deportations, and high tariffs that Trump has campaigned on. This economic policy is expected to push up inflation and interest rates in the USA – and thus the dollar exchange rate.
Trump has flagged 10-20 percent tariffs on goods from all countries – including Sweden – and 60 percent on Chinese goods.
This would be a hard blow to world trade – not least if it becomes the starting point for a wave of retaliatory measures in the form of tariffs on goods from the USA from the EU and China.
Sweden is a small and open economy, dependent on exports and imports. So it's clear that a trade war would affect Sweden, says Beck-Friis.
More friction around global trade
Beck-Friis' base scenario ahead of the Swedish Central Bank's interest rate decision on Thursday is – as the market also believes – that there will be a so-called double cut of 50 basis points (0.50 percentage points) to an interest rate of 2.75 percent.
We wouldn't be surprised if they cut by 25 basis points instead, he says.
Two reasons why the Swedish Central Bank might settle for 25 basis points on Thursday are the weakened krona exchange rate and the rising inflation expectations in the longer term, he adds.
Beck-Friis reminds us that even the Democratic Party's candidate Kamala Harris has protectionist elements in her policy. As does the EU, with its new tariffs on electric cars from China.
We'll likely have to count on more friction around global trade over the next five years, he says.
Pimco is a heavyweight on the global bond market – where, among others, the Swedish state finances itself – with managed assets worth 2,000 billion dollars (equivalent to 21,400 billion kronor).
Market players expect the Swedish Central Bank to have cut the interest rate to 2.50 percent by the end of the year. The probability of a double cut of 0.50 percentage points on Thursday is 86 percent in the pricing ahead of the decision.
The Swedish Central Bank has flagged two or three cuts of 0.25 percentage points this year and continued cuts down to 2.25 percent a bit into 2025.
The market expects, according to the pricing, that there will be one or two more cuts within a year to an interest rate around 1.75-2.00 percent.
If mortgage rates follow the interest rate down by 1.25-1.50 percentage points, the interest cost for a mortgage of three million would decrease by 37,500-45,000 kronor per year.
