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Krona New Franc as Riksbank Accepts Top Currency Position

Krona New Franc as Riksbank Accepts Top Currency Position
Strategists raised their estimates for the currency against the dollar by about 8 percent in less than three months as the central bank signaled that it sees no need to curb the krona’s advance. Photographer: Matthew Lloyd/Bloomberg

Sweden’s krona is becoming the new Swiss franc for investors seeking higher interest rates in a growing economy that has a trade surplus and falling debt load.

It’s the best performer in a basket of developed-market peers since June, with a 3 percent advance, about twice that of the second-place Norwegian krone. The median of economist estimates compiled by Bloomberg is for Sweden’s economy to grow 1.2 percent this year even as the euro region contracts. Truckmaker Scania AB says the currency’s appreciation won’t stop it from boosting capacity.

Strategists raised their estimates for the currency against the dollar by about 8 percent in less than three months as the central bank signaled that it sees no need to curb the krona’s advance. That’s in contrast to the dollar, which fell last quarter as Federal Reserve Chairman Ben S. Bernanke’s open-ended stimulus plan debased the currency, and the euro, which weakened amid a third year of debt turmoil.

“The krona can go a lot further,” John Taylor, the founder and chief executive officer of New York-based hedge fund FX Concepts LLC, which manages $3 billion, said in a Sept. 27 interview. “Sweden has the wind behind it because Bernanke is making the dollar go down and Europe keeps having these traumas.”

Rising Estimates

The currency has the potential to reach 6.35 versus the greenback by the end of November, Taylor said. That would mark a 3.5 percent gain for the krona, which was at 6.5723 per dollar as of 7:45 a.m. today in New York. It has rallied from 7.3285 per dollar on June 1, the weakest level this year. The currency was 0.4 percent weaker at 8.4732 per euro, following a 0.9 percent advance last week.

Strategists are having trouble keeping up with the gains. They raised their year-end forecast to 6.62 per dollar on Sept. 28, from 7.17 in July, the median estimates of analysts compiled by Bloomberg showed. The mid-2013 estimate jumped to 6.81 from 7.12.

Like the Swiss franc, the krona benefits from a surplus in its current account, the widest measure of trade. That means the government doesn’t need to rely on foreign capital. Unlike Switzerland’s currency, policy makers aren’t seeking to cap its appreciation. The Swiss National Bank imposed a ceiling on the franc in September 2011 of 1.20 per euro.

The Swedish krona has “all the pillars that you need to be a safe haven,” Peter Frank, a foreign-exchange strategist at Banco Bilbao Vizcaya Argentaria SA in London, said in a phone interview on Sept. 28. “The Swiss franc is a very highly valued currency relative to its history, whereas the Swedish krona, if you go back into the ’80s and ’90s, was a lot stronger than it is now throughout most of that period.”

Shrinking Debt

The Bloomberg Correlation-Weighted Index for the krona was at 55.972 today, compared with as high as 108.6276 in 1976 and more than 80 in 1992. The gauges have a start date of Jan. 2, 1975, and a base value of 100.

The krona is the ninth most-traded currency, Bank for International Settlements data show, accounting for 2.2 percent of the $4 trillion average daily trading on foreign-exchange markets in 2010. That compares with the Swiss franc’s 6.4 percent share.

Public debt has fallen every year since 2009 and will decline to 31.2 percent of gross domestic product in 2015 from 38.4 percent last year, the government said Sept. 20. Sweden forecasts a budget surplus in 2014 after deficits of 0.3 percent of GDP in 2012 and 0.6 percent in 2013.

Options Traders

Investors are rewarding Sweden beyond its currency. At a yield of 1.48 percent, the government pays about the same to borrow for 10 years in the bond market as Germany. The OMX Stockholm 30 Index is up 8.56 percent this year.

Options traders have eased bets the dollar will gain against the krona. The so-called three-month 25-delta risk reversal rate fell to 0.75 percent on Sept. 14 from 3.4 percent on May 18, signaling a reduced demand for calls, which grant the right to buy the greenback against the Swedish currency, versus puts, or the right to sell.

Sweden’s economy has expanded more than twice as fast as the euro zone the past two years after lagging behind in 2008 and 2009. In 2011 it grew more quickly than any Group-of-10 peer, as well as Norway, Brazil, Australia and New Zealand.

That can’t last, according to Steven Barrow, head of G-10 research at Standard Bank Plc in London.

“Any kind of idea that a country can defy gravity in terms of its economic performance when most of Europe is in recession and other countries are slowing down is fantasy,” he said in an interview on Sept. 25.

‘Reality Check’

The stronger krona and waning demand from Europe, which accounts for 70 percent of exports, may be starting to bite. Sweden’s trade surplus shrank to 3.3 billion kronor ($502 million) in August from 10.4 billion kronor in January.

While it cut its benchmark interest rate by a quarter point to 1.25 percent on Sept. 6, the Riksbank signaled that it will keep borrowing costs unchanged until the middle of next year. Since then, Sweden’s second-quarter economic growth was revised down to an annual 1.3 percent from an earlier estimate of 2.3 percent.

The revision may prove a “reality check” for Swedish policy makers and encourage them to lower rates, said Barrow, who recommends investors sell the krona. “The Riksbank have adjusted to that and probably will adjust more with easier policy going forward.”

‘Find Solutions’

Scania Chief Executive Officer Martin Lundstedt said on Sept. 26 he’s confident the economy will bounce back and is maintaining investment to increase output. While Sweden’s second-biggest truckmaker is able to adjust production between Europe and Latin America, it doesn’t have any plans to change strategy because of the strong krona, he said.

“If this continues for a long period of time we will find solutions to keep our competitiveness,” Lundstedt told reporters at the company’s investment meeting in Soedertaelje, where Scania is based.

Swedish Prime Minister Fredrik Reinfeldt said in an interview on Sept. 4 that the krona’s value is “not a short-term phenomenon, it’s something we should get used to.”

Sweden’s economic, institutional and government financial strength is “very high,” underpinning the country’s Aaa bond rating, Moody’s Investors Service said on Sept. 3 in an annual credit report. The current account surplus will be 6.9 percent of GDP this year and 6.5 percent next year, according to the median forecast of eight economists surveyed by Bloomberg.

Relative Rates

Even after last month’s rate cut, Sweden’s benchmark rate is 50 basis points, or 0.5 percentage point, higher than the European Central Bank’s and 100 to 125 basis points above the Fed’s.

That helped the krona appreciate 2.8 percent this year, based on Bloomberg Correlation-Weighted Indexes. It rose for a fourth straight quarter against the euro, climbing about 3.9 percent, as it strengthened against all 16 of its major peers.

“The krona is at a level, which is stronger than many times before, but it’s not an extraordinary or different krona strength,” Riksbank Governor Stefan Ingves told the Swedish parliament’s finance committee in Stockholm on Sept. 18. “That’s perhaps not that remarkable since we have a big current-account surplus and we have sound public finances or generally a decent economic development compared with others.”

Riksbank policy makers estimate they will need to raise the rate to about 3 percent in three years as the global economy recovers, according to their published predictions.

“The krona can begin to capitalize on its own distinct merits, including the comparative strength of its fiscal and external balances,” Daragh Maher, a currency strategist at HSBC Holdings Plc in London, said in a Sept. 27 interview.

The bank, the most bullish forecaster, estimates the krona will strengthen to 5.83 per dollar by mid-2013.

“The growth slowdown in Sweden is a headwind to the krona,” Maher said. “But not fatal to its prospects.”

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