SEK Takes the Crown

March 10, 2025
6 min read

SEK Takes the Crown

SEK is the top performing major currency year-to-date, up by almost 10% versus USD. A potential build-up in European defense spending, Germany moving towards a big fiscal thrust, and the Riksbank winding down monetary easing have fueled the broad-based rally in SEK. USD/SEK has room to edge lower towards 9.0000 if the US growth outlook sours relative to other major economies.

SAAB and Germany turbocharged SEK

Europe is racing to boost military spending. This has benefited the Swedish Aeroplane Corporation (SAAB), one of Europe’s defense giants, and triggered a sharp appreciation in SEK. The European Commission announced last week plans for a “ReArm” package worth €800bn. The package includes €150bn in borrowing facility and €650bn space within which member states can borrow for defense purposes.

 

Additionally, the German government could invest as much as €1 trillion over the next decade. The package includes €500 billion for infrastructure spending and a special measure to amend the constitution to exempt defense spending above 1% of GDP from the constitutional debt brake. To appreciate the magnitude of this proposal, Germany invested €1.5 trillion over two decades following the reunification of East and West Germany. Germany is Sweden’s largest trading partner, accounting for 10% of Sweden’s total exports. As such, a massive German fiscal stimulus package that leads to an improvement in the country’s economic growth outlook bodes well for SEK.

Riksbank is done easing

The Riksbank slashed rates by a total of 175bps since May and pencils-in the policy rate to bottom at the current level of 2.25%. Markets have adjusted towards the Riksbank’s forecast in the past few weeks after pricing-in a lower terminal rate of 2.00%.

Inflation in Sweden is tracking above the Riksbank’s forecast and reinforces the case for no more rate cuts. In February, the policy relevant CPIF rose 0.7pts to a one year high at 2.9% y/y (Riksbank: 2.2%) while CPIF ex-energy rose 0.3pts to 3.0% y/y (Riksbank: 2.4%). In contrast, the Fed is in the early phase of an easing cycle with 75bps of cuts priced-in over the next 12 months. The implication is that U.S.-Sweden 2-year bond yields spreads have narrowed sharply in favor of a lower USD/SEK.

USD/SEK is overvalued

We estimate long-term fundamental equilibrium for USD/SEK at 8.5000, implying a 20% overvaluation relative to the current spot rate. USD/SEK has room to correct some of its massive overvaluation and trade closer to the level implied by U.S.-Sweden real 10-year interest rate differentials at around 9.0000. The recent batch of soft U.S. economic data has shifted the near-term growth outlook advantage away from the U.S. to other advanced economies. This regime change is a drag on USD. Technically, USD/SEK needs to break through important support at 10.0000 to gain downside momentum.

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