In textbook 292, reading 28, question 22, the third paragraph says “due to recent monetary tightening by the Riksbank forward points for the SEK/EUR rate have swung to a premium.”
I do not understand the relationship. If the monetary policy is tighten, then there is less money supply, which means SEK will appreciate. So the SEK/EUR will decrease in the future (e.g. from 3 SEK per EUR to 2.5 SEK per EUR). Then the forward rate of SEK/EUR will decrease, which means a forward discount. Then why “forward points for the SEK/EUR rate have swung to a premium”?
All I’m saying is that if you want to know whether SEK is appreciating or depreciating, look at EUR/SEK, not SEK/EUR. If EUR/SEK increases, SEK is appreciating; if EUR/SEK decreases, SEK is depreciating.
S2000 - I am having trouble understanding the same question. Why would nominal rates for the SEK be expected to increase for tight monetary policy? Wouldn’t tight monetary policy = low expected inflation, and thus lower nominal rates? Confused as to why nominal rates would increase?