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Citigroup to BNP Say Buy Nordics as Inflation Stirs: Currencies

It’s time to get back into Scandinavian currencies, according to strategists from Citigroup Inc. (C) to BNP Paribas SA (BNP), who say last week’s inflation reports will encourage Sweden and Norway to re-assess monetary policies.

Norway’s krone will rally more than any other Group-of-10 currency by year-end, climbing 4.7 percent versus the euro and 1.5 percent against the dollar, according to forecasts compiled by Bloomberg as of the end of last week. Sweden’s krona will rise 2.1 percent against the euro. The Nordic currencies are the worst performers in a basket of major peers this year, with the krona plunging 6.4 percent and the krone 2.6 percent, Bloomberg Correlation Weighted Indexes show.

Evidence of faster inflation in the nations’ consumer-price reports on July 10 will prove to be a turning point, strategists say, ending a bias toward cutting interest rates to prevent lagging prices from weighing on growth.

“Both of those currencies will appreciate from here,” Steven Saywell, the global head of foreign-exchange strategy at BNP Paribas in London, said in a July 10 phone interview. “The market’s gone too far in pricing a rate cut.”

More Bullish

The median of more than 30 analyst estimates in Bloomberg surveys puts Sweden’s krona at 9 per euro and Norway’s krone at 8 to the shared European currency by year-end.

France’s biggest bank is even more bullish. It sees the krona appreciating to 8.95 per euro in the third quarter and to 8.9 by year-end, from 9.2454 as of 7:32 a.m. in New York. It predicts a gain in Norway’s krone to 7.80 in both periods, from 8.4119 today.

Norway’s underlying annual inflation rate rose in June to 2.4 percent, approaching the fastest pace in five years. That’s 0.1 percent from the central bank’s target of about 2.5 percent and is stoking speculation policy makers will shelve the talk of rate cuts that helped send the krone plunging to a 4 1/2-year low of 8.5477 per euro this month.

At its June 19 policy gathering, Norway’s Norges Bank warned that lower borrowing costs may be necessary to boost investment. While it left its benchmark rate at 1.5 percent for a 14th consecutive meeting, it pushed back the timing of any tightening to the end of next year.

Price ‘Headache’

Citigroup, the world’s biggest foreign-exchange trader, expects Norway’s currency to advance to 8.10 per euro and the krona to strengthen to 9.10 over the next 12 months.

“Inflation remains very close to target and more krone weakness would create a headache for the Norges Bank,” Josh O’Byrne, a foreign-exchange strategist at Citigroup in London, said by phone July 10. “For now, the bias is to be long Norwegian krone” as policy makers have “no obvious desire to weaken the currency.”

Across the border in Sweden, where the Riksbank exceeded economists’ estimates with a 0.5 percentage-point rate cut on July 3, a recovery from deflation is encouraging bets that further reductions in borrowing costs won’t be necessary.

Consumer prices rose 0.2 percent in the year to June, the most since October 2012 and after a 0.2 percent drop in May. The krona plunged to an almost three-year low of 9.3887 per euro after the main rate was reduced to 0.25 percent, matching the record set back in 2009-2010.

Rates Bottom

While Danske Bank A/S says Norwegian rates have also bottomed, it cut its forecasts for both the krone and the krona last week, citing their recent declines and the “surprisingly dovish actions” of the central banks.

Denmark’s biggest lender predicts the krona will weaken to 9.40 per euro in a month, compared with an earlier estimate of 9, and reduced its krone forecast to 8.40, from 8.20. It’s more optimistic in the longer term.

“We do not expect the Norwegian economy to weaken further and trigger a rate cut,” Morten Helt, a senior analyst at Danske Bank in Copenhagen, said in a July 11 report. “In the medium to longer-term, we still expect euro-krone to edge lower.”

Even with Norges Bank warning that oil companies will pare investment by 10 percent next year, Norway’s economy is in good shape, which should support the currency, according to SEB AB.

The Swedish lender predicts the krone will appreciate to 8.15 to 8.20 in the next month or two before ending the year at 8.15. It’s less optimistic on the Swedish krona, predicting a drop to 9.30 to 9.35 in July or August before a rally back up to 9 by mid-2015.

Economic Recovery

Norges Bank raised its 2014 forecast last month for gross domestic product growth excluding oil and gas to 2 percent, from a prediction of 1.75 percent in March. Sweden’s government cut its outlook on July 4, and sees the economy expanding 2.5 percent this year and 3.1 percent in 2015, compared with April estimates of 2.7 percent and 3.3 percent.

“From a macro perspective there’s very little reason for Norway to cut rates,” Carl Hammer, the Stockholm-based chief foreign-exchange strategist at SEB, said by phone on July 10. “The economy is doing relatively well, though the main worry is the prospect for weaker investment in the petroleum sector. If they don’t cut rates, it’s fair to say euro-krone will move lower again.”

To contact the reporters on this story: Rachel Evans in New York at revans43@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net; Stephen Treloar in Oslo at streloar1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Armstrong, Robert Burgess

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