Worst-Performing Major Currency Seen Gaining in Turnaround

(Bloomberg) -- The krona is the worst-performing major currency this year. That may be about to change.

Sweden’s krona should recover from this month’s eight-year low of 10.35 per euro as factors that have weighed, such as weaker-than-forecast inflation, are either already priced in or will improve, according to SEB AB. The bank sees it appreciating to 9.80 per euro by the end of the year, while Nordea AB -- which along with SEB make up the two largest traders of the krona -- sees a potential strengthening toward 10.05 over the next month.

The krona has declined more than 4.5 percent against the euro this year in a move that accelerated after core inflation data surprised to the downside in January. The trend was then given further impetus after the outlook for Riksbank’s first interest-rate hike in seven years was thrown in doubt when most of the central bank’s policy makers in February discussed delaying it.

“The krona trades at historically stretched levels,” said Carl Hammer, head of macro and currency research at SEB in Stockholm. “Swedish core inflation numbers should ensure a stabilization and ultimately a reversal of the current uptrend in euro-krona.”

SEB expects data on Thursday to show that the Riksbank’s targeted measure of inflation quickened to 2.1 percent in March from 1.7 percent in February, while Nordea sees it matching the central bank’s 2 percent target.

Negatives Priced

Credit Agricole SA expects that the recent slowdown in Swedish inflation is over and that some negatives are already in the price of the currency.

“With that in mind, a positive surprise will likely have a disproportionately greater impact on the krona” than if price-growth data disappoints, said Valentin Marinov, head of Group-of-10 foreign-exchange research at the French bank, which has a year-end euro-krona target of 9.60.

Sweden’s currency was little changed against the euro at 10.2970 as of 12:55 p.m. in Stockholm on Tuesday.

The decline in the krona versus the common currency in recent months isn’t justified by fundamentals and leaves it appearing undervalued, according to BNP Paribas SA currency strategists Natalie Rickard and Alexander Jekov, who see the krona at 9.60 per euro by year-end.

“The Swedish economy continues to outperform and we continue to see scope for a tightening cycle to become more fully priced in, which is likely to help the krona recover,” the BNP Paribas analysts wrote in a note to clients. Still, the Riksbank has said it doesn’t want the currency to strengthen sharply and recent rhetoric has been dovish, “so there is a risk that policy tightening is delayed,” they said.

One potential headwind that may cloud the outlook when Swedish policy makers announce their next decision on April 26 is the threat of an escalation in the current trade tensions between the U.S. and China, which might hit the krona due to the economy’s reliance on exports.

However, risk appetite could improve in the short term as China and the U.S. may seek to defuse trade tensions through talks, which would benefit the krona, according to Martin Enlund, chief analyst at Nordea.

That, combined with other fading headwinds, such as a seasonal reduction in the overseas transfer of Swedish company dividends into foreign currencies and an improvement in Citigroup Inc.’s economic surprise index for the nation, add to a growing list of reasons why investors should give the krona another shot, Enlund said.

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, Scott Hamilton, Keith Jenkins

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