Swedish Krona Still on Shaky Ground After Worst Loss Since 2009

(Bloomberg) -- The Swedish krona’s troubles seem far from over even after its worst slump since the global financial crisis.

Any recovery in the currency is likely to be delayed, in spite of its deepening undervaluation, as a downturn in Sweden’s housing market threatens to weigh on economic growth and inflation, according to Nordea AB and Danske Bank A/S. Seasonal dividend outflows in the coming weeks will also probably fuel krona weakness, SEB AB says.

Krona losses quickened in recent weeks as data showed an unexpected slowdown in consumer-price increases and the minutes of the Riksbank’s latest meeting showed policy makers were concerned inflation will undershoot target. That prompted banks including HSBC Holdings Plc to push back estimates for the timing of Sweden’s first interest-rate increase since 2011. Mounting risks of a global trade war, fueled by U.S. tariff plans, may also weigh on the currency, given exports account for 46 percent of the Scandinavian economy.

“New information has emerged that reinforces our negative outlook on the krona,” Danske Bank analyst analyst Stefan Mellin wrote in a research note. “The January inflation data were lower than our and the Riksbank’s forecasts. The minutes clearly signal that the Riksbank is concerned with the observation that services inflation has dropped and that wage growth refuses to take off.”

The Swedish currency slid 3.3 percent against the euro last month, the biggest such loss since February 2009, and is estimated by SEB to be as much as 11 percent undervalued. It strengthened 0.2 percent to 10.1633 per euro as of 1:18 p.m. in London on Friday. Nordea AB weakened on Friday its three-month forecast for the krona to 10 from 9.70 previously, and the year-end prediction to 9.70 from 9.50.

Economy, Rates

The recent weakness in economic data is fueling bets that the Riksbank will raise rates later than previously estimated -- a prospect that is relatively negative for the krona. HSBC and JPMorgan Chase & Co. now see the first rate increase happening in October, compared with earlier predictions for the second quarter. Danske Bank has a much more dovish outlook.

“Strictly looking at our core inflation forecast, it is hard to see how the Riksbank will be comfortable raising rates either this year or the next,” Danske’s Mellin wrote. The bank recently lowered its krona forecast and now sees it trading at 10.20 per euro in three months.

An unexpected spike in inflation could, however, snap the decline in the krona, according to Karl Steiner, a strategist in Stockholm at SEB, which still suggests awaiting weaker levels in the 10.30-10.35 range to buy the currency.

The risk of new trade barriers amid U.S. plans for new tariffs is bound to weigh on Sweden’s currency, according to ING Bank NV. That means that a degree of a “trade war risk premia” is warranted for the krona, given the nation’s high exposure to global trade, economist Jonas Goltermann and strategist Petr Krpata wrote in a research note.

To contact the reporter on this story: Love Liman in Stockholm at jliman1@bloomberg.net.

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

©2018 Bloomberg L.P.