Scandinavia’s most important exchange rate, EUR/SEK, continues to make new ground for this decade. The rate climbed last week to its highest since 2009, at 10.35, reflecting a grim set of circumstances for the Swedish krona – circumstances in which it wrestles with a dovish central bank and the threat of an international trade war.
The krona, which ranks as the world’s ninth most traded currency, has lost more than 5% against the euro in 2018 and has recently overtaken the Canadian dollar to become the worst performing G10 currency of the year. The amount of krona per euro remains a decidedly important factor for the economy of Sweden given that half of the country’s trade is with EU countries.
At the forefront of krona news flow in recent months has been the dovish U-turn by Sweden’s central bank, the Riksbank.
In early 2018, upbeat comments from the Riksbank prompted a number of analysts to recommend buying the krona. In January, the bank’s governor, Stefan Ingves, suggested that inflation was finally aligned with the bank’s target and that the time for monetary policy normalization was near after years of aggressive stimulus, which have seen both quantitative easing and negative interest rates deployed.
One can imagine the disappointment then, when in March, Ingves stressed to parliament the importance of “proceeding cautiously” on interest rate increases, further retreating from the bank’s previous optimism and adding to the clear concerns for inflation expressed in the bank’s most recent meeting minutes. Inflation in Sweden has deteriorated markedly since last summer, falling from 2.2% to just 1.6% in the year to February, well below the Riksbank’s 2% target.
As a currency sensitive to global growth, the krona has also been tossed around amid the storm surrounding US-China trade. A trade war between the two could, according to analysts, derail the global economy’s recovery, and this remains a possibility given last week’s announcement by China of tit-for-tat tariffs on US-manufactured goods and Friday’s threats by the US of more of its own tariffs.
In the coming year, the krona is likely to claw back some ground against the euro but aspirations for rates below 10.0 in the near term need to be quashed. In one recent survey of institutions by Danske Bank, only one-third of respondents said that they foresaw sub-10 rates at any point within the second quarter.
With Sweden’s inflation and growth outlooks deteriorating, and with instability in the domestic housing market – by some measures, Swedish home prices are down 6% since August – it appears possible that the Riksbank will maintain interest rates at current levels throughout the entirety of 2018, and this would undoubtedly keep the krona heavy.
The Riksbank will next announce updates to monetary policy on April 26th.