The worst housing-market crash and the fastest inflation since the 1990s are turning Sweden into an early victim of the global tightening cycle — driving its currency to an almost 14-year low as policy makers walk the line between saving an overleveraged economy and taming price growth.
(Bloomberg) — The worst housing-market crash and the fastest inflation since the 1990s are turning Sweden into an early victim of the global tightening cycle — driving its currency to an almost 14-year low as policy makers walk the line between saving an overleveraged economy and taming price growth.
The krona sank as much as 0.6% to 11.4434 per euro on Monday, its weakest level since March 2009. Though the currency later pared the drop, it’s still down almost 8% in the past 12 months.
High levels of household debt, plunging home prices and rising bankruptcies have shut the Scandinavian currency out of the recovery seen by the euro and the pound as inflation in Europe shows signs of peaking and growth improves. In Sweden, a preponderance of short-duration mortgages mean rate hikes bite immediately into consumers’ wallets and overall consumption.
That’s left Sweden’s Riksbank facing the scenario central banks dread when it meets on Thursday — higher rates risk tipping the economy into recession, while less-aggressive action allows inflation to spiral. The krona’s latest leg down is a result of this worsening tradeoff that’s battered the currency for months.
“Markets seem to be betting a bit more that the Riksbank will find itself in a bit of a trap with high inflation and low growth, and troubled property markets,” said FX strategist at ING Groeup NV Francesco Pesole.
Bank of America Corp recommends selling the Swedish krona against the dollar, while Danske Bank A/S has a position to dump it against the Norwegian krone. Even the New Zealand dollar, the most illiquid G10 currency, is a buy against the Swedish krona — one of RBC’s top trades this year.
No Takers
“I can’t think of any natural takers of the krona right now,” said Christian Borjesson, head of fixed income at Swedish state-owned pension fund AP1.
“To bring about a reversal of the krona’s weakness, the Riksbank will have to signal on Thursday that it’s going to outpace what’s currently priced in by markets, but I don’t think it will do that,” he said.
Swedish interest rates have climbed to 2.5% over the past year, their highest since 2008, on a par with the European Central Bank. But a sluggish economy is seen keeping the Riksbank from hiking rates beyond 3.3% this year, according market pricing compiled by SEB, leaving it potentially lower than terminal rate expectations for the ECB of around 3.5%.
“Even if we get another hike, the message from the Riksbank’s forward guidance will probably be that it is at or very close to the end of its tightening cycle and it’s stopping relatively early,” said Adam Cole, head of FX strategy at RBC Europe.
On top of the unattractive yield differential, the krona is viewed as a risky wager among G-10 currencies. As a result, it tends to sell off heavily when markets are jittery, and Cole said it may extend its slide beyond RBC’s mid-year target price of 11.5 per euro.
The krona pared some of its daily decline on Monday, trading at around 11.3876 per euro as of 2:15 p.m. in London.
Pressure Points
Cracks in the housing market are keeping investors on edge. As builders warn higher energy prices and rising interest rates are deterring buyers, the International Monetary Fund has suggested Sweden may need to bolster bank buffers given the real estate sector’s dependence on market funding.
Along with Finland and Portugal, Sweden’s mortgages have the shortest durations among European countries, with around 60% of loans issued for less than a year, while more than half of the country’s loans are on variable settings, according to ING. This makes them highly vulnerable to policy changes, and is adding to concerns that the housing market could crumble further if rates continue to climb.
–With assistance from Greg Ritchie and Love Liman.
(Adds analyst, asset manager comments, adds details throughout)
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