HSBC Joins Deutsche in Betting Swedish Krona Gains Not Over
A 6 percent gain in the past year against the euro has still left the krona undervalued, according to Henrik Gullberg, a London-based exchange-rate strategist at Deutsche. While some measures show the currency is expensive, it enjoys a community of loyal investors eager to hold assets backed by stable AAA governments, said Daragh Maher, a strategist at HSBC in London.
The krona is proving irresistible as accelerating economic growth and policy makers’ near-indifference to the exchange rate support its ascent. And as the euro area sinks deeper into its debt crisis, the relative appeal of anything sold out of AAA rated Scandinavia’s largest economy is growing, HSBC and Deutsche say.
“The market is happy to buy an over-valued currency because it’s AAA,” Maher said in an e-mailed reply to questions yesterday. HSBC estimates the krona will reach 8.10 against the euro by the end of the year, compared with a high of 8.3059 yesterday. The currency gained 0.1 percent against the euro to 8.311 as of 8:59 a.m. in Stockholm.
According to Gullberg at Deutsche, the krona is the only currency backed by a AAA government that still looks cheap. He estimates “valuation won’t become an issue” until it reaches as strong as 7.75 to 8 per euro. That’s unlikely to happen until “sometime in the second half of the year,” he said.
The krona soared as much as 0.8 percent against the euro yesterday following a stronger-than-estimated manufacturing survey that supported the central bank’s projection it won’t need to cut interest rates again. Manufacturing grew at the fastest pace since June 2011, according to a purchasing managers’ index published yesterday by Swedbank AB. (SWEDA)
Sweden’s Riksbank left its main rate unchanged in February at 1 percent and signaled no more easing, following four cuts since December 2011. The bank estimates the economy will grow 1.2 percent this year and 2.7 percent in 2014. The 17-member euro area will contract 0.3 percent this year and grow 1.4 percent in 2014, the European Commission said on Feb. 22.
“There’s limited room for the Riksbank to cut rates further,” Gullberg said in an e-mailed reply to questions. The krona boasts “an attractive valuation,” he said. “It’s the only undervalued AAA rated developed-market currency.”
The krona has gained 5.9 percent against the euro in the past 12 months, the best performance in the period of a major currency after the Mexican peso and the New Zealand dollar, according to data compiled by Bloomberg.
Those gains have left the krona too expensive according to some measures, said Maher. It’s 24 percent overvalued versus the euro this year, topping 12 major currencies, according to calculations from the Organization for Economic Cooperation and Development. Maher argues that makes the krona less appealing than Norway’s krone, which is backed by the world’s largest sovereign-wealth fund, the biggest budget surplus of any AAA nation and faster economic growth rates. Norway’s krone has gained 1.3 percent against the euro in the past year.
“My concern regarding the Swedish krona is a relative one,” Maher said. “It strikes me that the krona’s gains against the Norwegian krone, for example, look rather overdone. I like the Swedish krona, but would need to be a little selective about which currencies I would buy it against.”
Yet other measures show the krona is still cheap. The Sweden Purchasing Power Parity Exchange Rate CPI index suggests the krona is 21 percent undervalued, relative to average values between 1982 and 2000.
Svenska Handelsbanken AB said in a note today that Sweden can cope with a stronger currency and the krona has “nothing to fear but itself.” It’s “hard to argue” that the krona is overvalued, the Stockholm-based bank said, citing Sweden’s current account surplus and trade-weighted measures.
While the central bank of neighboring Norway has shown it’s willing to cut rates to stem currency appreciation, Riksbank Governor Stefan Ingves said in an interview earlier this year he’s “happy” with the krona’s appreciation. Prime Minister Fredrik Reinfeldt has said he welcomes the krona’s gains, arguing they make traveling cheaper for Swedish tourists.
There is “no sign that officials, politicians or central bankers are worried about krona strength, which I believe is a result of the fact that in real terms the krona is not particularly strong,” Gullberg said.
“On all our longer-term valuation metrics, the krona is still undervalued,” he said. “This is also backed up by the real effective exchange rate, which only now is back at pre- crisis levels, and still about 5 percent to 6 percent weaker than it was 10 years ago, despite stronger fundamentals.”
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