Nordic Currencies Stung in Crisis as Ingves Reverses

Nordic Currencies Stung in Crisis as Ingves Reverses Policy
Swedish currency, krona notes and coins. Photographer: Erik Abel/Bloomberg

Sweden and Norway are losing their appeal as havens from Europe’s debt crisis at a time when the krona and krone are more overvalued than at almost any point in the past 40 years.

Sweden’s central bank cut interest rates for a second-straight meeting on Feb. 16 after exports, accounting for about half of the nation’s output, fell 6 percent in December. Norway’s foreign trade slid 4.3 percent in the fourth quarter. The Swedish krona is about 25 percent too expensive, and the Norwegian krone more than 40 percent based on an Organization for Economic Cooperation and Development measure of the relative costs of goods and services.

Concern the krona’s appreciation is weighing on growth amid the euro-region’s turmoil marks a reversal from late 2010, when Riksbank Governor Stefan Ingves dismissed calls to manage the currency. His Norwegian counterpart, Oeystein Olsen, said last week he’s ready to act on krone strength even as European leaders crafted a second Greek bailout and the U.S. economy showed signs of gathering strength.

“Those currencies need to depreciate,” Peter Von Maydell, head of foreign-exchange strategy at Credit Suisse Securities in London, said in a telephone interview on Feb. 14. “Monetary policy in the case of Norway and Sweden is resisting currency strength.”

Forecast Cut

Sweden’s Finance Minister Anders Borg said on Feb. 17 that the government will cut its 2012 growth forecast to 0.5 percent from an August estimate of 1.3 percent as the debt crisis reduces exports ranging from appliances by Stockholm-based Electrolux AB to SKF AB’s ball bearings. The day before, the Riksbank lowered its benchmark repo rate by 0.25 percentage point to 1.50 percent, and forecast it will stay there through the first quarter of 2013. The central bank previously signaled it would average 1.8 percent at the beginning of next year.

The Norges Bank lowered its overnight deposit rate on Dec. 14 by a greater than forecast 0.5 percentage point to 1.75 percent, the biggest reduction since May 2009. Weaker demand from debt-strapped Europe and krone strength have prompted some exporters to announce job cuts. Renewable Energy Corp. ASA, a Sandvika-based maker of solar energy components, said on Oct. 26 that it would shut some plants, affecting 700 workers.

The krona and krone are lagging behind the Australia and New Zealand dollars, also seen as havens, after outperforming a year ago, according to data compiled by Bloomberg.

Relative Performance

Since Oct. 27, the krona had fallen 1.7 percent as of 4:03 p.m. London time, as measured in a basket of 10 developed-market currencies, Bloomberg Correlation-Weighted Indexes show. The krone was 1.4 percent lower. Australia’s dollar was 2.5 percent higher, with New Zealand’s dollar rising 5.3 percent.

The krona was little changed today at 8.8102 per euro, and rose 0.2 percent to 6.6414 against the dollar. The krone weakened 0.3 percent versus the euro to 7.5284, and slipped about 0.1 percent to 5.6722 against the dollar.

Analysts predict the Nordic currencies will depreciate against the dollar and the euro through at least the third quarter. The krone will weaken to 7.60 per euro and drop to 6 against the dollar, according to the median of more than 20 forecasts compiled by Bloomberg. The krona will decline to 8.89 versus the euro and to 6.90 per dollar, separate surveys show.

The krone is overvalued against the dollar by about the most since at least 1970, based on a gauge of purchasing power parity by the Paris-based OECD that tracks prices of similar goods and services across countries. The krona is also overvalued by about the highest in more than 40 years.

Watching for Response

“There are limits” in how much currency strength the Norwegian and Swedish economies can take, Bjoern-Roger Wilhelmsen, chief interest-rate and currency strategist at Swedbank First Securities in Oslo, and a former central bank economist, said in an interview on Feb. 17. “A substantial appreciation would lead to monetary policy responses.”

Losses in the currencies may also be compounded because they are two of the four least-traded currencies within the Group of 10, Bank for International Settlements data show, making it harder for international investors to exit.

The two accounted for 3.5 percent of the $4 trillion average daily turnover in foreign-exchange markets during the three years ended in 2010, according to the Basel, Switzerland-based BIS.

‘Thrown Around’

“Their illiquidity is definitely a negative when markets are in risk off mode,” said Adam Cole, global head of foreign-exchange strategy at RBC Capital Markets in London. “They tend to be thrown around by general risk appetite. They’re both vulnerable at the moment to their exposure to the euro zone.”

Euro-region gross domestic product will shrink 0.5 percent in 2012, according to the median forecast in a Bloomberg survey of 19 economists. That compares with 1.6 percent growth in Sweden and 2.2 percent in Norway, separate surveys show. U.S. GDP will increase 2.2 percent, according to another poll.

Greece won a second bailout after European governments wrung concessions from private investors and tapped into European Central Bank profits to shield the euro area from a precedent-setting default. Finance ministers awarded 130 billion euros in aid, engineered a central-bank profits transfer and coaxed investors into providing more debt relief in an exchange meant to tide Greece past a March bond repayment.

No Net Debt

As the euro region contracts this year, the Nordic currencies appeal as havens may outweigh prospects for further rate cuts, according to Claire Dissaux, the London-based managing director of global economics and strategy at Millennium Global Investments, which oversees about $12 billion.

“On both currencies I hold pretty positive views and more so possibly at the current levels on the krona,” Dissaux said in a Feb. 16 interview. “In Sweden and Norway we’ve got good sovereign balance sheets and no need for fiscal consolidation.”

Norway, the world’s seventh-biggest oil exporter, has no net debt and the biggest budget surplus of any AAA rated nation. Sweden, similarly top rated, has shrunk government debt every year since 2009 and its budget is in surplus.

The Norwegian central bank is monitoring the krone as policy makers focus on boosting competitiveness in the nation, Olsen said. “We follow closely the krone developments,” he said in a Feb. 16 interview. “There is no specific level at which we react.”

He said today in a speech in Oslo that the krone has “strengthened markedly” from “an already strong level.”

Growth slowed in the fourth quarter as the debt crisis curbed exports. GDP, excluding oil, gas and shipping output, grew 0.6 percent after 0.8 percent in the previous period, Oslo-based Statistics Norway said Feb. 16.

Missed Estimates

“Some segments of the export industry are feeling the effects of lower turnover and a strong krone,” Olsen said in the text of a speech the same day.

Weaker demand from Europe means one in four exporters are planning to cut staff this quarter, according to the Confederation of Norwegian Enterprise on Feb. 14.

“Sluggish growth in the euro area has subdued the demand for Swedish exports, which slowed down significantly in 2011,” the Riksbank said Feb. 16.

Electrolux, the world’s second-biggest appliance maker, said Feb. 2 that fourth-quarter demand in western Europe fell 3 percent from a year earlier “following deterioration in several major southern European markets.” Net income was 220 million kronor ($33 million), less than the 581 million kronor average estimate in a Bloomberg survey of 13 analysts.

Bonds, Stocks

SKF, the largest maker of ball bearings, which are used in construction cranes and cars, said Jan. 26 that sales will probably be “slightly lower” in Europe in the first quarter. Tom Johnstone, chief executive officer of the Gothenburg-based company, said in an interview that Europe is a concern for the company.

Sweden’s trade surplus shrank to its narrowest in more than a year at the end of 2011, Statistics Sweden said on Jan. 26.

Bond markets have also underperformed. An auction of Swedish 2022 bonds on Feb. 8 drew the lowest demand in more than a year. The nation’s 10-year borrowing costs rose above those of Germany a day earlier for the first time since September.

The OMX Stockholm 30 Index of equities has risen 12 percent this year, lagging behind euro-region indexes in nations including Greece, Germany and Finland. Norway’s benchmark index rose 9.9 percent this year.

“We believe the risk lies to the downside as the growth slowdown, currency overvaluation and an easing-rate cycle should offset any upside from an uptick in risk appetite,” Adrian Lee, president and chief investment officer at currency manager Adrian Lee & Partners in London, said in an e-mailed response to questions on Feb. 17.

The euro-region outlook “should keep the Nordic central banks in an easing cycle,” he said. “This should see krone-krona depreciation.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE