Sweden’s Riksbank came out fighting with its call for a stronger krona, but many see the currency ultimately hamstrung by economic reality.
(Bloomberg) — Sweden’s Riksbank came out fighting with its call for a stronger krona, but many see the currency ultimately hamstrung by economic reality.
The central bank’s signal of further rate increases, pledge to start asset sales and call for a stronger krona took some by surprise — driving the currency’s biggest intraday gain versus the euro since 2009, according to data compiled by Bloomberg.
But strategists say the krona’s fate remains intricately bound to the nation’s economic woes, which have denied it the kind of recovery seen in the euro and the pound.
The krona will continue to be “everyone’s favourite short” for as long as Sweden continues to be saddled with massive private debt, low savings, a volatile housing market and a weaker economy, said Gareth Gettinby, investment manager at Aegon Asset Management UK Plc.
Riksbank Makes a Push for Strong Krona After Half-Point Hike
The worst housing-market crash and the fastest inflation since the 1990s turned the Nordic nation into an early victim of the global tightening cycle — with the currency hitting an almost 14-year low versus the euro before Thursday.
The Riksbank said that a stronger krona was “desirable,” while its new governor Erik Thedeen fired a warning shot to “those who speculate against” the currency. That marked a departure from previous communication, with the bank having faced criticism for being too sanguine on the currency’s weakening.
This has pushed the krona to its highest level since late December, but the policy shift is “not enough to turn around the longer term trend for EUR/SEK,” said Karl Steiner, chief quantitative strategist at SEB in Stockholm. “For this we probably also need the soft landing theme to take hold both in Sweden and the rest of Europe.”
A Housing Crash Takes Down the Krona and Sounds Inflation Alarm
The prospect of easing euro-zone inflation could give a rate differential boost in favor of the krona in coming months, said Steiner. But he noted ongoing weakness in the housing market will continue to be a problem. A preponderance of short-duration mortgages mean rate hikes bite immediately into consumers’ wallets and overall consumption.
Policy Surprise
The bank’s plan to cut its asset holdings at a faster pace with sales of government bonds as well as issuing Riksbank Certificates — short-dated securities issued by the central bank to soak up market liquidity — surprised many market watchers. In using more than rate hikes to tighten policy, it hopes to push up shorter-dated Swedish rates, entice more foreign investment and strengthen the krona.
Investors will need to see signs that the Nordic region’s biggest economy has turned a corner before committing funds, said Stephen Gallo, head of European FX strategy at BMO Capital Markets.
“If the Riksbank is looking to shore up SEK by attracting more inward investment, investors may need confirmation that the economy is through the worst of the economic downturn first,” he said.
Another obstacle for traders is the limited size of Sweden’s market when it comes the country’s assets. “You can’t get the same size done in Swedish bonds as you can in US Treasuries of course, so that’s a consideration for larger funds,” said Gareth Hill, fund manager at Royal London Asset Management Ltd.
For now the Riksbank’s efforts have provided a jolt to the currency. It has also reduced the need for the central bank to directly enter the market to support the krona for now, said Simon Harvey, head of FX analysis at Monex Europe Ltd.
But the boost will likely be temporary, he warned. “The fundamentals for Sweden are just so poor.”
–With assistance from Libby Cherry and Love Liman.
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