Hedge Funds May Be Challenging Riksbank on Krona, SEB Says

Hedge funds may be gearing up to place bets against the Swedish central bank’s efforts to halt gains in the krona, according to SEB AB.

It must be “a concern” that the krona has only weakened to about 9.21 per euro from about 9.15 last week after the bank said it was prepared to intervene directly in the currency market, said Johan Javeus, chief strategist at SEB, in a note.

“The market seems eager to challenge the Riksbank and there are rumors that many foreign hedge funds are long kronor and see a weakening of the krona after a possible intervention as a good buying opportunity,” he said. Exporters are also “structural krona buyers” and will probably exchange their foreign revenue after a dip, he said.

The Riksbank on Dec. 30 warned it was moving closer to intervening after the krona appreciated last month. On Monday, it sent out a statement that it had delegated the authority to Governor Stefan Ingves and his first deputy to “instantly” intervene in the market if necessary. The Riksbank will probably need to contact primary dealer banks to warn them before it steps into currency markets, according to SEB, Swedbank and Danske Bank.

The central bank has shown it isn’t prepared to tolerate a krona exchange rate that’s much stronger than 9.10-9.15 against the euro, according to Anna Breman, chief economist at Swedbank. It traded at about 9.22 as of 10:50 a.m. in Stockholm. But intervening in currency markets may prove “politically controversial,” and hedge funds could decide to test the Riksbank’s resolve, she said.

With a benchmark interest rate already at a record low of minus 0.35 percent and several rounds of bond purchases behind them, policy makers are under pressure to consider other measures to boost inflation. Underlying price growth has been below the Riksbank’s 2 percent target since the beginning of 2011 and headline price growth has hovered below zero for much of the past three years.

A currency intervention must now be “very close” and a tolerance level of between 9.00 and 9.10 “seems reasonable,” Javeus said. The bank will probably have to sell 2 billion kronor ($235 million) to 3 billion kronor to have any reasonable effect, he said.

The krona has appreciated amid signs that Sweden’s economic growth is accelerating. The National Institute of Economic Research projects gross domestic product will expand 3.9 percent this year.

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