#Market Strategy — 11.04.2018

Positive Outlook for the Swedish Krona

Guy Ertz

We do not think the current Swedish Krona (SEK) valuation reflects the strong economic fundamentals. We forecast that the EUR/SEK will move to around 9.80 in 3 months and to 9.30 in 12 months. We upgrade our view to Positive.

The economic and interest rate outlook are supportive

Sweden has enjoyed strong growth in recent years. The economy expanded by 2.7% in 2017 and is expected to post a broadly similar figure in 2018. Activity is supported by strong domestic demand and exports. Both fiscal and monetary policies are currently expansionary and support further economic growth. The employment rate has levelled off to a high level  and labour shortages have begun to appear in recent quarters. Looking at the country’s national accounts, the government’s budget balance has been in surplus since 2015 and government debt is relatively low. More broadly, Sweden has a strong external position, having a material and quite consistent trade surplus. Moreover, this Nordic country has attracted important foreign direct investments in recent years.  

We expect the Riksbank (Swedish central bank) to start raising its benchmark interest rate in the second half of 2018 after having ended its quantitative easing programme last December. Indeed, the central bank broadly reached its goal to boost inflation towards 2%. The market is currently pricing in one 0.25% interest rate hike in the next 12 months and another one in 2019. This leaves room for the markets to reprice the Riksbank’s monetary tightening. The ECB is not expected to raise its target rate before late 2019. This is a key support for the  Swedish krona. The difference in interest rates, especially for real interest rates (excluding inflation), has been a good indicator of currency movements. Current levels also suggest that the Krona has room to appreciate against the euro.

Buy opportunity for the Swedish krona (against euro)

The Swedish krona has lost around 4.5% versus the euro year-to-date. The depreciation has largely resulted from doubts that inflation will rise sufficiently to oblige the central bank to raise rates. These concerns seem to be clearly overdone. The same is true for the potentially negative effects of ongoing fears on trade restrictions.

These doubts have pushed down the krona to unprecedented levels since the Great Financial Crisis (2008-2009), ensuing a build-up of a large short positioning on the Swedish krona. Technical indicators based on moving average analysis show a clear divergence from historical patterns while the relative strength index suggests that the Swedish currency is oversold against the euro. We forecast that the EUR/SEK will move to around 9.80 in 3 months and 9.30 in 12 months (value of one euro).

Vulnerability to housing market evolutions?

The main medium-term risk in Sweden is the housing market and related effects on banks. Indeed, the country was subject to a classic house price bubble in the early 1990s followed by a banking crisis. However, the country has learned its lesson and has even been cited as an example on how to tackle such crisis. The situation today is not comparable. It is true that house price are high but several factors limit the risks. The housing supply has increased, which suggests that further price increases should be limited. The authorities have taken new macro-prudential measures (as for example amortization  requirements) which should improve lending conditions.

A recent report by the IMF revealed that the profitability of banks remains strong and supported by positive lending activity. The main risk is a sharp rise in interest rates which looks very unlikely as wage growth, and thus inflation, should remain limited over the coming quarters. At the country level, Sweden has a strong fiscal balance with a current account surplus.