Sweden’s currency has this week hit its weakest level since the aftermath of the global financial crisis, underperforming its developed market peers and potentially posing a challenge to the typical dovishness of the country’s central bank.
The krona dropped as low as SKr10.721 against the euro on Tuesday and has continued to trade near those levels on Wednesday. It marks the soggiest levels for the Scandinavian currency since the summer of 2009.
Having fallen 8 per cent this year, the krona has sharply under-performed the Norwegian krone, its regional counterpart, which is up 0.9 per cent for 2018.
“We see the Swedish krona very vulnerable in the current environment as both domestic and external factors point to more krona weakness,” said Petr Krpata, a currencies strategist at ING, warning that he expects a further fall this year to SKr11.
Mr Krpata pointed to several factors as placing pressure on the currency. Among them are a cooling economy and a “dovish Riksbank”.
On the latter point, investors are bracing for the Swedish central bank’s forthcoming monetary policy meeting, which is scheduled for next Wednesday.
Lina Fransson, fixed-income strategist at SEB, said that “although the Riksbank has favoured a weaker currency in recent years, the board did not seem too happy with the weakness after the April meeting.”
“The krona back at these levels will surely come into play as regards the Riksbank’s meeting next week,” she said. “Hence, we expect the Riksbank to try to avoid a dovish surprise.”
Ms Fransson said she reckons the Riksbank will assume “some kind of hawkish tone, still pointing to a rate hike in December this year as the most likely scenario.”
In contrast, Mr Krpata said “we don’t expect the central bank to provide help to the battered krona . . . if anything we see a risk of a modestly dovish language.”
He said in addition to the domestic economic questions, upcoming elections in early September present another risk.
“On the external side, the spectre of trade wars is a clear negative for the krona as Sweden is a small open economy, thus vulnerable to concerns about the direction of the global trade,” he added.
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