A cautious outlook from Sweden’s central bank this week ensured the volatile krona kept its status as this year’s worst performing major currency against the dollar and the euro ahead of weekend elections that have been dominated by the rise of a populist, far-right party.
The krona has been under pressure all year, leaving it down more than 10 per cent against the dollar and 7 per cent weaker against the euro, as Swedes vote on Sunday in an election that opinion polls suggest could establish the Swedish Democrats as the country’s second-biggest party in the Riksdag, Sweden’s parliament.
Worries about populism in Europe has helped shape foreign-exchange markets over the past two years, holding back the euro before elections in France, the Netherlands and Italy. However, analysts say the krona’s decline probably has more to do with the erratic positions taken by the Riksbank, the central bank, than politics.
The krona regained some ground on Friday, a day after the currency was knocked when the central bank pushed back the timing of a hike in interest rates. Sweden’s overnight borrowing costs have been in negative territory since 2014, despite the central bank lifting its GDP forecast for this year to 2.9 per cent. Policymakers said that inflation was also close to its 2 per cent target but that pressures remained moderate once energy prices were discounted.
The Riksbank’s delay was “difficult to fathom really,” said Derek Halpenny, forex strategist at Japanese bank MUFG.
While analysts and investors believe the central bank has previously ignored the obvious signs of a strong economy, they also know the Riksbank is anxious not to get too far ahead of the European Central Bank which itself has pushed back its timetable for raising rates.
The probability of a hike in February remained high, said ING, but “the Riksbank’s history of delaying hikes again and again means we still see further delays until later in 2019”.
Stefan Ingves, Riksbank governor, told Bloomberg after this week’s decision that “we’re getting closer [to a rate increase] and that’s pretty clear.”
Some analysts say the krona shares some characteristics with an emerging market currency, as Sweden’s open economy leaves it vulnerable to global trade fluctuations and US-China tensions. The krona’s correlation with the MSCI Emerging Markets index is the strongest among major currencies, according to Brown Brothers Harriman.
By contrast, markets have more confidence in Sweden’s neighbour, Norway. Its growth prospects are not as robust, core inflation is only at 1 per cent and, like Sweden, it has high levels of household debt.
Yet investors are convinced Norges Bank will lift rates this month, given the country’s oil producers are benefiting from the buoyant crude price. The Norwegian krone is broadly unchanged against the euro this year.
Norway also has little political disruption to worry about — unlike Sweden. Since July 10, when polls showed the Swedish Democrats in a tie with the ruling Social Democrats, the krona has fallen 3 per cent against the euro.
Although the election looks like resulting in stalemate, investors are assuming that something akin to the status quo will prevail since the chief rivals to the Swedish Democrats have ruled out entering into coalition with it. In volatile trading on Friday, the krona jumped more than half a per cent against both the dollar and the euro.
From Monday, the question for investors will be what effect a political stalemate would have on the cautious Riksbank. Given their record, an indecisive election outcome may be all the excuse policymakers need to remain circumspect. The Swedish krona’s position as the G10’s laggard is unlikely to come under threat, analysts say.
Ulrich Leuchtmann, a currency strategist at Commerzbank, predicted the Riksbank would not raise rates until “hell is freezing over”.