The Riksbank’s decision to hedge a part of its currency reserves could be followed by institutional investors who share the central bank’s conviction that the krona is undervalued for no good reason, Governor Erik Thedeen said.
(Bloomberg) — The Riksbank’s decision to hedge a part of its currency reserves could be followed by institutional investors who share the central bank’s conviction that the krona is undervalued for no good reason, Governor Erik Thedeen said.
The Swedish central bank on Thursday announced a plan to hedge about a quarter of its reserves to protect itself from losses should the krona strengthen. In effect, that will mean selling $8 billion and €2 billion ($2.1 billion) for Swedish kronor over the next four to six months starting Monday.
“Eventually some of the large institutional investors might start thinking the way we are doing right now,” Thedeen said in an interview on Thursday. “It seems to be natural for an investment board or the board of a pension fund to have a discussion on hedging strategies, given the value of the krona.”
The Riksbank’s move — first flagged as a possibility in June — has been seen as covert currency intervention since it could buoy the krona, although officials insist that the intention is merely to safeguard against losses.
In a speech published on Friday, Thedeen reiterated he expects the exchange rate to strengthen in the long run as Sweden’s economy is essentially sound and well-managed. Trading in the krona is “largely driven by purposes that do not necessarily place so much emphasis on the ‘fundamental’ value of the krona,” he said.
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The logic of the hedging move is that the Riksbank is convinced that at some point the krona will recover from the recent record weak levels, which would inflict losses on its currency portfolio. That’s now led the bank to embark on a strategy that its governor believes other holders of foreign exchange might be wise to emulate.
The krona’s value, according to the Riksbank, is far below where it should be, judging from the fundamentals of the Swedish economy. On Thursday, it cited the International Monetary Fund’s assessment that this undervaluation was in between 4% and 15% last year in trade-weighted terms. Thedeen said he believes a reversal of the currency’s fortunes could happen rapidly.
“As the drift weaker to large extent is unexplained, the drift toward a stronger krona will also be, in one way or the other, unexplained,” he said. “I think it will be hard to understand exactly what triggered it.”
While he does agree that the hedging shows that the Riksbank is willing to put money behind its belief in the krona, the governor dismissed any suggestion that the move should be seen as some form of intervention and said it is unlikely to impact the exchange rate.
“It’s not an intervention, because those are typically undisclosed, not transparent and without any limits,” he said. “We have a set amount of about a hundred billion Swedish kronor. But of course, if these transactions strengthen the krona we’d be happy.”
–With assistance from Charles Daly and Anton Wilen.
(Updates with Thedeen comments from fifth paragraph.)
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