The Krona Rally May Be on Its Last Legs

(Bloomberg) -- The Riksbank just helped the krona extend its longest advance this year by staying hawkish amid global economic gloom, but the rally may already be on its last legs.

The Swedish currency rose Wednesday to a more than two-month high versus the euro after the central bank reiterated a plan to increase interest rates, diverging from the dovish stances of peers such as the European Central Bank and the Federal Reserve. The Riksbank's decision was “audacious” given the global economic climate, according to Barclays Plc. Danske Bank A/S called the move “stubborn” and sees both the policy and the krona's strength faltering.

“We strongly doubt that the Riksbank will be able to deliver a hike this year and probably not even next year,” said Stefan Mellin, a senior analyst at Danske. “We do not think that this will be a medium-term game changer for euro-krona, but rather something that may offer buying opportunities for traders and importers alike.”

The krona rallied to 10.4880 per euro Wednesday, its strongest level since April 23, adding to gains over May and June. Danske predicts the Swedish currency will weaken to 10.80 in six months and then 10.90 in 12 months. The median estimate in a Bloomberg currency survey projects the year-end exchange rate at 10.60.

Barclays strategists Wen Yan and Nikolaos Sgouropoulos recommend a four-month call spread option strategy to position for a potential pullback in the krona, betting the Riksbank will shift to a dovish stance at coming meetings.

“The Riksbank's hawkish rhetoric is unlikely to persist,” the analysts wrote in a client note. The central bank may adopt a “decisively more dovish rhetoric in coming meetings, while not excluding the possibility of some easing by year-end,” they wrote.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

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

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