Sweden Moves to Quash Krona Haven Trade as Greek Vote Approaches

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Sweden’s central bank just reminded traders they should be careful in seeking out the krona as a haven from the rising turmoil in Greece.

The bank shocked the markets Thursday, sending the krona down as much as 1.2 percent versus the euro, by unexpectedly deepening negative interest rates and boosting its quantitative easing program by almost 50 percent.

The move “clearly shows they will go the length, doing almost everything -- reasonable or not reasonable -- to prevent the krona from appreciating,” said Carl Hammer, chief currency strategist at SEB AB.

Policy makers are going all in to prevent any krona gains from making it all but impossible to jolt the largest Nordic economy out of disinflation. They were forced to respond after record stimulus by the European Central Bank threatened to drive up the krona and further hamper their fight to bring back price growth, which has been near zero since the end of 2012.

DNB ASA, Norway’s largest lender, one of only four banks to predict a cut, said the decision could be seen “as a precautionary one to prevent any large impact from Greece” on the krona, according to senior economist Kyrre Aamdal.

Changing Communication

Earlier moves had limited success in capping the krona, as the ECB bond purchases and the turmoil in Greece weighed on the common currency. The KIX krona index, a trade weighted measure, had before Thursday strengthened about 3 percent since mid-April, raising concerns among policy makers.

The Riksbank said in a statement that it has “a high level of preparedness” to add stimulus and said it can “intervene on the foreign exchange market if the upturn in inflation is threatened as the result of, for instance, a very problematic development in the markets.”

“Our communication around currency intervention has changed slightly,” Deputy Governor Martin Floden said Thursday in an interview after a seminar in Visby, Sweden. “You can look at that communication and make a judgment based on that. It’s of course a conscious communication.”

Nordea Bank AB, the largest Nordic lender, said doing nothing would have “invited further krona strength” and that the Riksbank is “fighting gravity” by trying to undermine the krona. The cut will help krona stay at 9.20 per to 9.40 euro.

“The krona is cheap versus most other currencies,” said Martin Enlund, chief analyst at Nordea. “This means that the krona will ‘want’ to gain if left to its own devices, and a fairly quick drop below 9.30 would make sense to us.”

Data Dependent

Nordea now predicts the bank will ease to minus 0.45 percent in September.

The central bank sees its repo rate unchanged over the next year, while offering a rate forecast that signals it may slide to below minus 0.41 percent by the end of the year.

Most analysts had scaled back expectations for a rate cut after an unexpected pick-up in inflation in May provided some relief to policy makers.

The bank kept its repo rate unchanged in April after two cuts earlier in the year. While the Riksbank reiterated that it is prepared to act between meetings if krona gains threaten inflation goals, a cut before September is seen as unlikely.

Any further moves will be “data-dependent,” said Colin Bermingham, an economist at BNP Paribas SA in London, who also predicted a Thursday cut. “Inflation, inflation expectations and the currency will remain the key variables to watch.”

For more, read this QuickTake: Less Than Zero

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