Scandinavian currencies: Choose caution

While the Scandinavian economies are quit resilient, the NOK has fallen sharply and disconnected temporarily from its traditional fundamentals. The same can be said for the SEK but the move was more modest. In a context of reduced visibility, we are moving from positive to neutral on these two currencies.

European exceptions

The Norwegian and Swedish economies are an exception amid the Eurozone which is mired in an economic slowdown from which the bloc is struggling to exit. Both countries are among the few European economies that have maintained their AAA sovereign ratings.

According to our latest forecasts, Norwegian growth (excluding oil and shipping activities) is expected to reach a high point this year at 2.3%, compared to 1.1% in the eurozone. The current account and fiscal balance are likely to continue to record a large surplus. Consumption would continue to grow, boosted by the rise in real wages, which were boosted by a particularly low unemployment rate (2.1% in October). The consumer price index declined in Q3 but core inflation remains strong, fluctuating above target (2%) and is expected to be maintained in 2020. Against this backdrop of strong domestic activity, the central bank has raised interest rates four times over the past 13 months but recently hinted that it would leave policy rates unchanged at 1.50% for the period ahead. While the rate differential, especially for “real” interest rates (deducted from inflation), has been a good indicator of fluctuations of the NOK, the recent weakening of the krona looks somewhat decoupled from monetary tightening.

Fundamentals of Sweden remain robust although activity has decelerated slightly. Momentum tends more towards a normalization of the economic situation after a period of strong growth. The labor market is expected to see a positive development in 2019. The employment rate has reached historical high levels, supporting wage growth. External and fiscal accounts are projected to remain positive this year while the debt-to-GDP ratio is projected to decline. Against a backdrop of rising inflation in 2018, the central bank raised policy rates last December. Despite the slight decline in inflation seen this year in an environment of high global uncertainty, the monetary authority announced a likely rate hike for the end of the year, before leaving interest rates stable for an extended period of time.

Some signs of running out of steam

In a context of sluggish global growth, Sweden has already begun to normalize its economic momentum. Growth was notably slowed by a weak development in domestic demand in the first half of the year, illustrated by a drop in the consumer confidence index. The outlook for the manufacturing sector would also be subdued, as evidenced by the recent fall in the Purchasing Manager Index Manufacturing. Despite strong growth in 2019, the Norwegian neighbour could also suffer from the less favourable economic environment. The growth differential with the euro area is expected to decline slightly due to the slowdown in Norwegian dynamics. Investment in the oil sector would decline after experiencing a sharp rise since 2018. Total investment would follow the same trend, discouraged by uncertainties about the global demand outlook. Moreover, the Economic Surprise Index indicates a recent turnaround to the benefit of the eurozone. The same observation can be made for Sweden (see charts below).

Technical analysis suggest some caution

Technical analysis suggests increased caution. The EUR/NOK (value of 1 euro) rose above the 200 day moving average on August. The value even surpassed previous record levels. The same can be said for the SEK. Moreover, moving averages are increasing, especially for the EUR/NOK. The 200 days moving average of the EUR/SEK is growing less strongly and the current level is between the two moving averages. This is therefore less worrying compared to the NOK.

We review our recommendations

Very recently, market sentiment appears to have improved and risk appetite should gradually recover. Despite this, we turn neutral on the Norwegian and Swedish krona given the lack of visibility. We also lowered our short and medium term targets to 10.20 in 3 months and to 9.80 in 12 months for the NOK and to 10.60 and then to 10.50 for the SEK (value for 1 euro). Although weaker, we continue to believe in their upside potential given the resilience of their economic fundamentals.