Banks Are Great at Wrongly Predicting the Strength of the Krona

(Bloomberg) -- It is proving tough for banks to snap out of the habit of wrongly predicting Swedish currency strength year after year.

Strategists penciled in krona gains each year from 2013, median forecasts in Bloomberg surveys show, but it moved the other way every time except once. This year may be no different despite analysts slashing calls in recent months -- the currency is projected to be one of the top performers among major markets, but is instead languishing at the bottom of the list with a loss of more than 4% versus the euro.

Sweden’s currency hit a decade low this month after the Riksbank in April signaled a delay in interest-rate hikes and extended its bond-buying program, prompting one analyst to say the bank had reactivated its “krona-killing machine.” With negative rates dissuading companies from repatriating funds to Sweden and the central bank signaling low tolerance to exchange-rate strength, the krona is “perfect” for short positions and as a funding currency, according to SEB AB.

“We have the most stubborn central bank in the world in terms of trying to fulfill its mandate,” said Carl Hammer, head of currency research at SEB. “They don’t have a target for the krona but it is very clear that they have worked very hard to weaken the currency. I think they are frankly quite surprised on how well they’ve succeeded in depreciating the currency.”

While the Riksbank has said it is “difficult” to explain the krona’s slump, criticism is mounting on its inflation-target fixation. The minutes of the central bank’s most recent meeting showed some dissent among policy makers, with Deputy Governor Cecilia Skingsley questioning the need for more stimulus.

Analysts slashed forecasts for the krona more sharply than for any Group-of-10 peer this year. The median estimate in a Bloomberg survey for the year-end dollar-krona rate slumped more than 8% since December, as the spot rate tumbled 7%. The euro-krona prediction slumped almost 6%.

The Swedish currency’s weakness can be explained to some extent by the greenback’s resurgence and the global trade conflict, but the recent dovish tilt in the Scandinavian nation’s monetary-policy outlook seems to be a key reason.

Too Dovish?

The easy monetary policy does seemingly clash with Sweden’s sound economic fundamentals. The nation has budget and trade surpluses, a top-rated bond market and an economy where inflation is outpacing most of its European counterparts. Latest data show consumer-price increases were in line with economists predictions at 2% and just below the Riksbank’s 2.1% estimate.

Yet, the option market has signaled increasingly bearish sentiment on the krona against the euro in recent weeks. One-year euro-krona risk reversals currently stand at 62 basis points in favor of the shared currency, the highest level since October. The krona was around 10.62 per euro in the spot market on Thursday.

Eric Stein, a Boston-based portfolio manager at Eaton Vance Corp., has a long position in the krona. Jeremy Stretch, the head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce, is keeping bets for a revival in the currency’s fortunes, predicting it to appreciate toward to 9.90-10 per euro by year-end. The current year-end forecast in the Bloomberg survey is 10.45.

‘Frustrating’ Currency

“It certainly has been a tough currency to forecast and a frustrating one to be long,” said Stein, whose firm manages close to $460 billion of assets. “The Swedish krona is always weaker than I think it should be. I would argue that Sweden would be one of the places in the world where negative rates are probably least appropriate.”

A combination of quantitative easing and negative rates is “toxic” for the Swedish currency, according to Martin Enlund, chief analyst at Nordea Bank ABP, who earlier called the central bank’s policy mix a “krona-killing machine.” “The Riksbank never cares about a weak krona, only about a strong one. It’s always on the bears’ side.”

CIBC’s Stretch is holding on to his view that the krona will recover in the coming months once the Riksbank realizes it has little reason to stay this accommodative.

“I have decided to leave my forecasts as they are even though they look ambitious,” he said. “There is significant scope for a durable recovery in the stokkie in the next three to six months. It is still manageable even as it looks an awfully long way from where we are now.”

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma

©2019 Bloomberg L.P.