Hedge Fund Starts Testing Swedish Riksbank’s Krona Resolve

  • Sees flatter yield curve as Riksbank gains ECB independence
  • Swedish yield spreads to widen versus benchmark German notes

Hedge fund Ambrosia is betting the Swedish central bank will let its guard down on the krona after turning the corner in its battle to revive inflation.

As inflation expectations also head up, policy makers will be able to stake out more independence from the European Central Bank, which is forging ahead with even more levels of stimulus to spark inflation.

The 1.5 billion-krona ($185 million) Ambrosia fund is positioned for a krona strengthening and a widening in the yield spread on Swedish short-term rates over their German counterparts, according to asset managers Kerim Kaskal and Torbjoern Olofsson.

“The bar has been raised significantly for the Riksbank to ease policy further -- something we have expressed in our investments,” Kaskal said in an interview in Stockholm last week. “This could eventually lead to a rise in short yields and a flattening of the Swedish yield curve, and at the same time the Swedish krona should strengthen.”

Swedish policy makers in April slowed the pace of its record bond buying program, while keeping rates unchanged at minus 0.5 percent. Several members on the bank’s board have indicated they are content to stand pat on stimulus amid growing concerns over soaring housing prices and the impact of negative rates.

Still, the bank is prepared to counter any backsliding in its progress on reviving inflation, which was, based on an underlying measure, an annual 1.4 percent in April, up from a low of zero in March 2014. In a speech on June 3, Riksbank Governor Stefan Ingves said the scope for independent monetary policy may be smaller than previously thought, as economic policies in large economies and currency areas have important spillover effects on other countries.

Ingves and his colleagues have also warned it may intervene in the currency market if the krona strengthens too rapidly and threatens the upturn in inflation. So far this year the krona has weakened 1 percent against the euro. It declined 0.15 percent to 9.2547 as of 6:13 p.m. local time.

“The Riksbank has bought itself half-a-year with words alone,” Olofsson said in the interview. “And that might be enough for them if inflation and inflation expectations continue to rise as by that time they accept a stronger krona.”

Since the bank tapered its bond purchasing on April 21, the krona has weakened 0.8 percent against the euro.

Ambrosia started its funds in February and its main fund -- the XL fund -- has made a profit in each of the four months since.

Both Kaskal and Olofsson have worked at Brummer & Partners and set up Ambrosia to manage their own assets after leaving their former employer. They have all of their private capital invested in Ambrosia, which has a three-legged investment strategy based on market risk, relative value and macro/trend.

Ambrosia is positive on European stocks relative to U.S. equities because of the big difference in valuations. It’s also slightly positive in absolute terms, since it believes the market has underestimated the potential impact of the measures the ECB announced in March, which includes starting to buy corporate bonds on June 8.

“The market underestimates how powerful the ECB’s stimulus is -- both the purchase of corporate debt and loans to banks,” Kaskal said. “They will probably buy more investment grade corporate bonds than what is being issued, which might channel that money into other risky assets, such as stocks. Even Swedish financial institutes could issue loans in euros as it might be cheaper.”

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