Bank of America has told investors that a short position on the euro against the Swedish krona offers an effective hedge should geopolitical tensions in the Middle East progressively ease. In a research note published Thursday, the bank specifically recommended shorting EUR/SEK using a three-month zero-cost risk reversal structure.
The recommendation rests on the view that the Swedish krona has lagged its high-beta peers since the April 7 ceasefire announcement tied to the U.S.-Iran confrontation. BofA strategists describe that lag as excessive when weighed against Sweden’s underlying domestic fundamentals.
Analysts at the bank pointed to several reasons to expect a significant recovery in SEK if geopolitical risk declines. They highlighted recent fiscal stimulus measures in Sweden and characterized the Riksbank’s posture as balanced, factors they see as supportive for the currency. BofA also expects Sweden to be among the stronger G10 economies in terms of growth.
Beyond domestic policy, the bank cited external drivers that could benefit the krona. These include an improvement in global risk sentiment, a potential medium-term softening of the U.S. dollar, and higher European fiscal and defence spending. Sweden’s strong fiscal position and its role as a major exporter of electricity were identified as additional buffers that could reduce vulnerability to energy-related shocks.
On market structure, BofA drew attention to an elevated EUR/SEK options skew. Current pricing, the bank observed, heavily favors euro calls over puts. Strategists expect that imbalance could compress rapidly if geopolitical concerns continue to ebb, amplifying potential downward pressure on EUR/SEK.
Separately, the note acknowledged stresses on BofA’s existing long EUR/NOK recommendation. Norges Bank’s unexpected interest-rate increase and its signal that another hike could be possible have altered the outlook for the Norwegian krone. The bank cautioned that markets might be assuming an overly optimistic combination of persistently high oil prices and robust equity markets; if those conditions change, the krona could face downside pressure.
In sum, BofA regards SEK as its preferred de-escalation hedge among major currencies, while flagging option-market dynamics and recent central bank moves in Norway as factors that complicate related currency recommendations.
Key implications include potential impacts on FX markets, European fiscal and defence-related spending flows, and energy-sensitive sectors given Sweden’s role as an electricity exporter. Traders and portfolio managers focused on currency hedging and cross-border exposures may find the suggested structure and rationale particularly salient.