Swedish Krona Has a Long Way to Go to Catch Norway's Krone

(Bloomberg) -- Other than sounding similar, Sweden’s and Norway’s currencies have little in common.

The Swedish krona is the worst performer against the euro among Group-of-10 peers this year, while the Norwegian krone is leading the pack, having appreciated more than 4 percent. This gulf is unlikely to narrow any time soon, given that monetary policy in the two countries remains skewed in favor of Norway’s krone, while Sweden’s currency is more vulnerable to global trade war concerns, analysts said.

Swedish Krona Has a Long Way to Go to Catch Norway's Krone

“While the krone-krona divergence in 2018 has been clear, it’s there for good reason,” said Viraj Patel, a currency strategist at ING Groep NV in London. “The balance of risks to Sweden’s krona go beyond monetary policy, external trade developments matter more, while Norway’s krone and Norges Bank policy is more domestic focused.”

Riksbank policy is “more synchronized” with the European Central Bank’s, which appears unlikely to hike rates before the latter half of 2019, Patel said. In contrast, Norges Bank has “taken the step to focus on domestic factors, which are clearly screaming out for a rate hike,” he said.

Norway’s krone touched 9.3867 per euro on Tuesday, its strongest level in more than eight months, as inflation data kept the prospects of a Norges Bank rate hike in September firmly in play. Sweden’s krona, which has weakened more than 4 percent against Europe’s shared currency this year, slipped further Thursday as inflation data came in slightly below forecasts.

‘Too Aggressive’

Norway’s currency has strengthened more than 9 percent versus Sweden’s this year. The pair was at 1.0906 as of 9:20 a.m. in London on Thursday. ING’s Patel predicts it will climb another 9 percent to end this year at 1.19. Analysts at Danske Bank A/S forecast the krona at 10.40 and krone at 9.30 per euro in six months, suggesting the cross would be at around 1.12.

“We still think the Riksbank is too optimistic on the inflation outlook,” said Kristoffer Kjaer Lomholt, a senior analyst at Danske Bank. “We expect krone-krona to edge even higher on a three-month horizon as Norges Bank will initiate its hiking cycle in September, while markets’ pricing of Riksbank monetary policy seems too aggressive to us.”

There was little surprise in Riksbank minutes released Thursday, with the weaker currency discussed once again and the chance of a rate hike this year kept intact. Annual underlying consumer-price inflation rose 2.2 percent in June, data from Statistics Sweden showed, compared with economists’ forecast of 2.3 percent.

ING’s Patel remains cautious. “We still feel reluctant in chasing a stronger Swedish krona,” he said. “Investors have been burned before by chasing a hawkish Riksbank story, only to be constantly disappointed.”

©2018 Bloomberg L.P.