Sweden’s Currency Has Biggest Rally in About a Decade

(Bloomberg) -- The Swedish krona's best quarter in about a decade may raise concern among policy makers that it rose too fast.

Should the Riksbank signal at its meeting Wednesday that it's concerned about the krona surge, which threatens exports accounting for about half of the economic output, that could trigger a pullback in the exchange rate, according to Toronto-Dominion Bank and Nordea Bank Abp. The median forecast in a Bloomberg survey is for the currency to slip by about 0.7% this quarter.

The krona has jumped about 9% from a low of 11.4262 per euro reached at the peak of the pandemic-fueled market turmoil. While the rebound drew on a broader view that the growth shock from the coronavirus could be short-lived, it also reflected Sweden's moves to keep its economy open and interest rates stable in the crisis -- which set it apart from peers and supported its currency.

The Riksbank, which half a year ago became the world's only central bank to exit a policy of sub-zero borrowing costs, is unlikely to revisit negative rates in Wednesday's announcement. It may, however, look at extending its quantitative-easing program -- a move that could damp the krona's strength.

“Given how far it has come, the krona could start to look vulnerable if the Riksbank does begin to voice concerns that it may be a little too strong for their liking,” said Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion. “Sweden didn't suffer the same degree of economic damage as other countries did. That leaves it in a better starting position and probably has a lot to do with why we've retraced so fully and so quickly.”

“But it also suggests there is a lot of good news embedded in the krona already,” London-based Rumpeltin said.

Still, should the Riksbank choose to wait until September before taking any new policy steps, the krona could extend gains, according to an internal trading room survey done by SEB AB. The poll said such a delay would be deemed hawkish and push the Swedish currency higher.

The krona rallied more than 4% against the euro last quarter, the best three-month run since March 2010. The pair was trading at around 10.4770 Wednesday morning in London. The Bloomberg survey sees the pair at 10.55 by end-September and at 10.50 by year-end.

While the jury is still out on Sweden's controversial decision to keep much of its society open even while the infection spread, the measure may have limited the economic impact, according to strategists. On the flip side, it also coincides with the nation having among the world's highest per-capita death rates.

Andreas Steno Larsen, chief currency strategist at Nordea, sees the Swedish currency weakening to 10.80 per euro in the next three months and isn't convinced that Sweden's looser lockdown was necessarily going to benefit the economy or the currency.

“I am not really a krona optimist,” Copenhagen-based Larsen said. “If anything, the Riksbank will conclude that the krona is too strong.” While it's not yet clear if Sweden's virus strategy has worked, “if we look at live-gauges of consumption it seems like all neighboring countries have rallied past Sweden by now. Sweden could be stuck with a semi-lockdown for longer,” he said.

©2020 Bloomberg L.P.