Biggest Nordic Bank Warns Election Mess Could Sink Swedish Krona

(Bloomberg) -- The normally stable affair of Swedish politics is getting interesting for the currency markets.

With the market turbulence around elections in Italy, Turkey and France still fresh in memory, traders are bracing for an election on Sept. 9 that some polls show will make a nationalist party calling for Sweden to exit the European Union the biggest group in parliament.

“Swedish elections are seldom interesting for the market,” said Martin Enlund, chief analyst at Nordea Bank AB. “The scope for risk premiums is usually limited. This year though, the parliamentary situation after the election looks more uncertain than ever."

The vote could spell the end to a postwar order of power shifting between two traditional blocs and finish the Social Democrats’ century-long reign as the largest party. With the established parties refusing to work with the Sweden Democrats because of its neo-Nazi past, all guesses are now on for how the potential gridlock will be undone.

Biggest Nordic Bank Warns Election Mess Could Sink Swedish Krona

Such turmoil could add to woes for those waiting on a krona recovery. The currency has been hammered this year, touching near a record low against the euro as the central bank kept interest rates far below zero and political risks mounted. Policy makers have been in an all-out battle to stabilize inflation over the past few years, cutting rates and snapping up about half the government bond market through quantitative easing.

Ahead of each general election since 1994, the krona has traded at about 9.20 to the euro or its precursor, but Nordea now sees it weakening to 10.47 up until the vote.

It’s “hard to predict the composition of the next government,” said Enlund. “And while not necessarily a problem, political uncertainty and risks of a new election can’t be a good thing should any gray or black swans emerge."

The anti-immigration Sweden Democrats has surged in the polls after the Nordic nation emerged as a haven for refugees during the migrant crisis in 2015. It has siphoned off voters from both the Social Democrats and the largest opposition party, the Moderates. Adding to the suspense is that two smaller parties, the Greens and the Christian Democrats, are polling below the 4 percent needed to remain in parliament, further complicating the landscape.

The polls also signal growing support for the Left Party, the only other group along with the Sweden Democrats in the eight-party parliament that wants to leave the EU.

Biggest Nordic Bank Warns Election Mess Could Sink Swedish Krona

Based on current opinion polls, the two would easily win more than the combined 117 seats in parliament needed to call a referendum. The Left, however, has said it won’t push for such a vote unless it’s clear that public opinion is against the EU, which it currently isn’t. It’s also unlikely to team up with the Sweden Democrats.

Nordea predicts that the krona could then strengthen to about 10 per euro after the election amid speculation the central bank will carry through a planned rate hike in the fourth quarter. That said, Nordea predicts the bank won’t be able to raise rates already this year.

©2018 Bloomberg L.P.