Of the G10 group of currencies, the Swedish krone has seen the highest gains against EUR and USD over the year to date, surging a whopping 7% against the US dollar and almost 1% against the continuously strengthening euro. The surge came after the currency hit rock bottom in March as Covid-19 spread across the globe, with lockdown measures in Europe – Sweden’s major trading partner – hurting the Swedish krone.
Sweden’s relatively relaxed coronavirus containment measures resulted in a high death toll when compared to regional peers such as Denmark, but infections have fallen after their initial peak and have not re-accelerated. As a result, Sweden managed to escape a deep economic contraction as seen in some eurozone countries. Weekly unemployment data has shown signs of improvement, while Sweden’s GDP levels are also on a firm footing with the activity indicator printing 3.2% in July. All in all, Sweden’s economic trajectory makes the krone appealing to investors compared to most of the G10 space as many European countries are currently dealing with a worsening virus outbreak. With the above developments in the eurozone and Sweden in mind, we expect the Swedish krone to trade towards the following levels over the 1m, 3m, 6m and 12m horizon.
The Riksbank implemented a negative interest rate policy from 2015 until 2019 and moved back to zero right before the global economy was hit by the pandemic, leaving no space for the central bank to cut rates when central banks globally started cutting. Instead, the Riksbank was left with asset purchase programmes, which it seized with both hands.
The central bank launched a SEK 300bn programme in March and extended it to SEK 500bn in its July meeting, running until the end of June 2021.
The July monetary policy report also stated that the Riksbank will begin purchasing corporate bonds in September as well. Comments from Governor Stefan Ingves indicate that a stronger SEK is not a “core issue” and that a rate cut is not currently necessary. This is in line with earlier comments from the Governor from before the pandemic, when he stated that the central bank will not go back to negative rates unless absolutely necessary. Ingves also reacted to the higher-than-expected inflation figures, saying that there is no need to be concerned if inflation overshoots the target for a period of time, as in an uncertain world, “it is very hard to make an exact calibration of monetary policy and inflation rate”. He added that it is too soon to say whether the Fed’s shift to average inflation targeting will lead to actual changes in policy. After increasing asset purchases in July, we therefore think the Riksbank will hold its interest rate at next week’s policy meeting.
Covid cases in Sweden stabilise while other European countries continue to see rising numbers
Sweden’s relatively loose approach to managing the coronavirus pandemic has been closely scrutinised globally. The number of Covid-19 related deaths has been significantly higher in Sweden than in neighbouring Norway and Denmark, leading to debate both within Sweden and internationally. However, the latest figures show that Sweden’s virus numbers have reached low levels, while Denmark and several countries throughout Europe are suffering a big surge in infections. The seven-day moving average of new cases in France stands at a record high, while the new rate of infections in Germany, the UK, Denmark and Norway have been increasing since July. In Sweden, however, the rolling seven-day average currently is at its lowest since March. One Swedish health official said that the current low number of new infections is the “vindication” of the nation’s relaxed Covid-19 strategy, but a study by the UK’s Royal Society of Medicine found that up to May, only 15% of the Swedish population had become infected, questioning the success of any herd immunity in the country. Whether the current low numbers are related to Sweden’s approach to the virus outbreak and the potential herd immunity the nation has created is to be seen, but for now, the virus trajectory in Sweden seems to be less of a concern relative to other Western countries, boding well for the domestic currency.
EURSEK steady while EURUSD climbs – signs of a strengthening euro and SEK
The latest data from Sweden shows that its economy may be headed to a faster recovery than the Riksbank’s expectations.
Headline inflation rose to 0.7% in August compared to the Riksbank’s expectation of 0.3%, but the headline figure includes the surge in energy costs. Sweden’s core inflation rate, excluding energy, eased to 1.41%in August, down from 1.5% in July. The inflation outlook may not be a pressing concern to the central bank however, as the SEK rally may push prices on imports lower and make exports more expensive. Additionally, wages have not been growing at the same pace as inflation. Unemployment fell by more than expected to 9.1% in August, while employment increased 1.0% over the month, confirming that the labour market is recovering more rapidly than expected by forecasters. In addition, new vacancies are increasing, suggesting that the peak of unemployment has been reached and a decline may be coming in the coming months as well. Personal consumption rose 3% month on month in Sweden, while the monthly GDP indicator printed at 3.2% MoM in July. The upbeat data has further supported the Swedish krone. It must be noted that the strength in the Swedish krone is less perceivable in the EURSEK cross than in USDSEK, considering the recent rally seen in EURUSD following the EU recovery fund agreement and the broad dollar weakness.
The eurozone remains pivotal for the Swedish krone, given the eurozone’s position as Sweden’s major trading partner. The EU accounts for around 70% of Sweden’s exports and prolonged scarring in major eurozone economies will likely weigh on the outlook of Sweden’s open economy, especially with the Riksbank arguably having their hands tied to further cut interest rates.
With this in mind, we expect the krone to act as a major countercyclical instrument before the next policy response is announced.
Author: Ima Sammani, FX Market Analyst