Sweden’s krona weakened to a five-month low against the euro on concern exports from the largest Nordic economy will struggle to find demand as the euro region’s debt crisis deepens.
The krona traded below 9 per euro today for the first time since Dec. 27. It was down 0.22 percent at 9.0020 against the single currency as of 11:29 a.m. in Stockholm.
Sweden’s fate is intertwined with that of the euro region because of its export reliance, Nordea Bank AB’s alpha strategy team wrote in a note to clients today. Half the country’s economic output comes from exports, 70 percent of which are sent to Europe. The continent’s debt crisis showed signs of deteriorating this week after May 6 elections in Greece and France gave more power to candidates critical of austerity.
“Sweden is still a very high beta country, hence our gross domestic product is highly correlated to Europe,” Nordea said.
The bank’s alpha team said it has recommended selling the krona against the euro, the Norwegian kroner and the dollar, arguing the trades are now “deep in the money,” according to a note to clients today.
The 17-member euro area will contract 0.3 percent this year, the European Commission said in its latest set of forecasts published today. Swedish economic output will expand 0.3 percent, lagging behind a 0.8 percent expansion in neighboring Finland and 1.1 percent growth in Denmark, according to the commission.
The Swedish central bank has cut interest rates twice since December, bringing its benchmark repo rate to 1.5 percent. While policy makers have signaled borrowing costs will stay at that level for a year before tightening resumes, a deepening euro crisis may prompt more rate cuts, according to Swedbank AB.
“The growing uncertainty over Greece continues to add pressure to an already weak Europe,” Anders Eklof, a Stockholm-based currency strategist at Swedbank, said by phone today. “Even though there is less risk in the financial system after the” European Central Bank’s three-year lending facility helped prop up bonds, “the market will likely price in continued risk for the Swedish economy and make one more cut from the Riksbank possible,” he said.
Swedbank predicts that the krona will weaken further to 9.1 against the euro “in the near future,” he said. “But we stick to our view of 8.75 in three months and that the Riksbank will remain unchanged.”
Riksbank Deputy Governor Lars E.O. Svensson said May 7 a stronger krona would be “problematic” for the Swedish economy and hurt exporters.
“If one could wish for something it would be that the krona weakened,” he said then.