Sweden’s Krona Sinks After Deflation Shock: Stockholm Mover

Sweden’s krona sank after a report showed consumer prices declined more than most economists had predicted.

The krona dropped as much as 0.7 percent against the euro and traded at 8.6311 as of 10:47 a.m. in Stockholm. The loss sent the krona to its lowest since April 23, taking closing prices into account. That left it the worst performer of the 16 major currencies tracked by Bloomberg against the euro, the dollar and the yen.

“We definitely got a bit of a surprise in the inflation numbers and the market now has to price in a higher probability of a cut by the Riksbank,” Kasper Kirkegaard, a senior currency strategist at Danske Bank A/S in Copenhagen, said by telephone. “All-in-all, the move in the krona seems fair.”

Consumer prices dropped an annual 0.5 percent in April, more than the 0.2 percent decline foreseen in a Bloomberg survey of economists. It was the lowest reading in the headline inflation gauge since November 2009. The result will probably prompt the central bank to lower its main rate from 1 percent to 0.75 percent at its next meeting in July, according to SEB AB.

“We continue to see lower inflation in 2014, also after the substantial downward revision” said Olle Holmgren, an analyst at SEB AB in Stockholm, in a note to clients.

Tightening Delayed

Sweden’s central bank last month delayed plans for monetary tightening after cutting its inflation forecasts, citing the strong krona and companies’ inability to pass on price increases. The bank signaled it’s likely to keep the repo rate at 1 percent until the second half of 2014. The krona had gained 5.1 percent against the euro in the year through yesterday.

“The surprises are mainly related to prices for imported goods and services, while domestic inflation was as expected,” Torbjoern Isaksson, an economist at Nordea AB, said in a note. The result reflected “krona strength and low global price pressure,” he said.

“All in all, inflation data is volatile and some prices should rebound in May,” Isaksson said. “Nevertheless, inflation is very low and significantly lower than the Riksbank’s forecast. We expect the Riksbank to stay on hold, but the probability of a rate cut clearly increased today.”

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