SWEDEN: The Swedish and Norwegian crowns, considered safe in the euro zone debt crisis, are likely to weaken in coming months as the risk of deflation in Sweden and falls in the price of Norway’s oil darken the outlook for both.
Sweden could face the brunt of any sell-off, analysts said. Its crown is set to become a funding currency – one with low interest rates used during times of robust risk appetite to borrow, and then sell to invest in other countries’ higher-yielding assets. Investors generally use the yen, the Swiss franc, and of late, the euro to fund such trades. Sweden’s currency joins the list after the Riksbank cut rates to a record low of zero percent on October 28.
Sweden’s central bank said it was ready, if required, to take unconventional measures that analysts said could include asset purchases, intervening in the currency market to sell crowns or imposing a currency cap like the Swiss National Bank. “In its fight against deflation, we expect the Riksbank to take more measures,” said Jonathan Webb, head of FX strategy at Jefferies. “We think that the Riksbank’s measures make the crown a funding currency and we are bearish about its prospects.”
Inflation in Sweden has undershot the Riksbank’s 2 percent target for years. And despite signs the economy is picking up, consumer prices have only risen in one month so far in 2014 on an annual basis. Looser monetary policy in the euro zone, which is Sweden’s most important trading partner, has generally meant a stronger Swedish crown versus the euro, which has added to the downward pressure on inflation.
The ECB is expected to ease policy further in coming months. That could keep the euro down and prompt the Riksbank to curb a resultant strength in the crown by easing policy aggressively. “Unless there is a large uptick in inflation, the Riksbank is likely to remain dovish,” Morgan Stanley analysts said in a note. At the height of the euro zone debt crisis in 2012, investors sold the euro and bought the Swedish and Norwegian crowns, drawn by both countries’ sound public finances, high credit ratings and reasonably solid banking systems.
This time, though, while the euro has fallen broadly against a basket of currencies, it has outperformed the Nordic pair. On Thursday, the Swedish crown was not far from a four-year low of 9.39 crowns per euro struck earlier this year while the Norwegian crown hit a trough of 8.6755 crowns per euro this week, its weakest for five years. In August 2012, the Swedish crown hit a 12-year high of 8.1780 crowns per euro. Even the Norwegian crown, which hit a decade high of 7.25 crowns per euro at the same time, has lost ground this year after weakening over 10 percent in 2013.
