Sweden's Krona Slides After Riksbank Pushes Back First Rate Hike

(Bloomberg) -- Sweden’s krona headed for the biggest decline in more than a week after the Riksbank pushed back the estimated timing of its first interest-rate increase since 2011.

The central bank held its benchmark rate at minus 0.5 percent, as predicted by analysts, and said borrowing costs may be raised by 25 basis points in December or February. While the central bank’s guidance indicates a later move than some in the market expected -- ruling out an October tightening -- the size of the projected hike is larger than a 10 basis point increase that was previously considered a possibility.

The Swedish currency led declines among Group-of-10 currencies, taking its losses against the euro in the past month to more than 2 percent, as uncertainty related to Sunday’s national election also weighed on it.

Sweden's Krona Slides After Riksbank Pushes Back First Rate Hike

The krona fell as much as 0.7 percent to 10.6087 per euro, before paring losses to 10.5875. Its weakness may prove temporary as some investors attribute a hawkish twist to the central bank’s message, which was more explicit about the timing and the size of the first rate hike than before.

“Beyond the revision of the rate path in a more soft direction, there will be a hike in December or February should inflation not fall out of bed,” said Carl Hammer, head of macro and FICC research at SEB AB in Stockholm. “The dovish krona reaction is transitory and may stay until after the election on Sunday, but to me there is scope now for selling euro-krona again.”

The currency slid last week to the lowest level since the global financial crisis amid speculation the Riksbank will delay plans to start raising rates from record lows. Also weighing on the currency has been uncertainty related to the upcoming national election on Sunday.

“The krona exchange rate also has a bearing on inflation, and it is important that the krona develops in a manner compatible with inflation remaining close to the target,” the Riksbank said in its statement.

Here’s what some analysts and fund managers say about the krona’s outlook following Thursday’s central bank announcement:

Ohman

  • The market reaction is somewhat surprising both in the krona and in rates as the Riksbank signals it will move in steps of 25 basis points and not 10 basis points, as have been speculated, portfolio manager Erik Nilsson said.
  • “I think the initial reactions today will fade over time even if we get a drawn-out formation of a new government after the election similar to Germany,” he said.

ING Bank NV

  • “We remain firmly bearish on the Swedish krona and expect EUR/SEK to reach the 11.00 level by the end of the year,” economists Jonas Goltermann and strategist Petr Krpata wrote in a note. “In our view, the probability of December or February hikes in great part depends on the krona price action/weakness. This means SEK weakness must come first for the Riksbank to react,” they wrote

Swedbank AB

  • “If uncertainty goes away a bit on the global picture and underlying inflation slowly moves up, then the krona will get support by a 25 basis point rate hike in December,” strategist Anders Eklof said.
  • “This is something to sell euro-krona against 10.70 levels for sure. On the negative side is perhaps that the Riksbank’s krona forecast has been revised around 3% weaker all the way to the end,” he said.

Credit Agricole SA

  • Investors are likely to remain cautious ahead of the general election over the weekend, arguing for some krona underperformance in the very near term, head of G-10 FX research Valentin Marinov said. Assuming a more benign outcome from the vote, Credit Agricole remains more constructive on SEK over the long-term, he said.

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