Swedish Krona Seen Rebounding From Wreckage Fueled by Stimulus

Sweden’s krona, the second-worst performing currency in the developed world in the past 12 months, is poised to turn a corner.

That’s how strategists see it, and they’ve raised their mid-year forecasts in March for the first time, according to Bloomberg’s survey on the currency. SEB AB, Scandinavia’s biggest foreign-exchange trader, predicts the krona will strengthen about 3 percent to 9 per euro by the end of 2015 as the nation which suffered the worst deflation among the Group of 10 economies finally gets prices to rise.

The change in sentiment for a currency that’s tumbled more than 12 percent versus its peers in the past year is a sign easing measures unveiled by Sweden’s Riksbank are helping. Analysts see the economy improving enough to allow the central bank to pull back from stimulus that’s undermined the krona.

“Inflation will pick up this year, which will allow the Riksbank to let its guard down a bit,” said Carl Hammer, the chief currency strategist at SEB AB in Stockholm. “We’ve already seen the lowest point against the euro.”

The krona has posted the biggest loss after the euro among a basket of its G-10 counterparts this year, sliding 4.8 percent, Bloomberg Correlation-Weighted Indexes show. Its 12.4 percent decline during the past year is second only to Norway’s krone.

ECB Stimulus

Monetary stimulus is largely behind the declines. The European Central Bank’s unprecedented 1.1 trillion euro ($1.2 trillion) debt-purchase program fueled the euro’s 6.5 percent slide against its peers in 2015, while Sweden’s surprise interest-rate cuts and its 40 billion kronor ($4.6 billion) government bond-buying plan led to the krona’s weakness.

Sweden’s currency has strengthened 1.7 percent versus the euro this year, to 9.2883 as of 9:55 a.m. in New York.

Strategists surveyed by Bloomberg have raised their median mid-year estimate for the krona to 9.28 per euro, from a forecast of 9.40 at the end of February. That’s the first monthly increase since that survey began in June. The third- and fourth-quarter estimates are both up about 1 percent in March, predicting rallies to 9.20 and 9.13 per euro.

The trend may be fueled by the ECB’s continued attempt to bolster growth in the euro region, according to Citigroup Inc. The world’s largest currency dealer predicts the krona will appreciate to 9.15 per euro by December after weakening to 9.45 in the next three months.

‘Significant Negatives’

“The negatives stemming from ECB policy, and the potential for ECB measures to be stepped-up eventually, are more significant negatives that could strengthen the krona,” said Josh O’Byrne, a foreign-exchange strategist at the U.S. bank in London. It’s still “really too early to buy the krona” given it may weaken in the next few months, he said.

Inflation in Sweden is starting to pick up, with consumer prices rising 0.07 percent in February from a year earlier in the first increase in seven months. Euro-region prices dropped an estimated 0.1 percent in March.

SEB, which predicts Swedish inflation will increase to 0.4 percent by September and 0.95 percent by December, also sees the potential for the krona to weaken before rallying through the end of the year. Hammer forecasts a decline to about 9.4 per euro by June because the Riksbank will ease again in April, before it starts tightening policy.

Unexpected Cut

The Riksbank surprised markets this month by cutting borrowing costs to a record-low minus 0.25 percent. The central bank has been trying to boost inflation after prices dropped for six straight months through January.

That deflation has been the weak point in a generally robust Swedish economy that Swedbank AB sees underpinning krona gains later in 2015. The nation is among the few where output is “well above” pre-financial crisis levels, the Organisation for Economic Co-Operation and Development said in a report published Monday. The Paris-based group predicted growth of 2.9 percent in 2015 and inflation of 0.5 percent this year and 1.5 percent in 2016.

“Toward the end of the year, the krona has potential to strengthen to around 9 against the euro as inflation slowly but surely starts to pick up,” said Stockholm-based Swedbank strategist Anders Eklof.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE