Sweden seen closer to krona intervention to tame exchange rate

04/01/2016 06:06 AST

Some of Scandinavia’s biggest banks are warning investors not to underestimate the risk that the central bank is preparing to intervene in the currency market.

Nordea and SEB both say the Riksbank won’t allow the krona to strengthen beyond 9 against the Euro. It traded at 9.187 on Friday. The prediction follows a Dec. 30 warning from the central bank that it’s ready to act if persistent krona strength gets in the way of its 2 per cent inflation target.

“The Riksbank decided to act preemptively after seeing strong domestic data of late and also to stave off any speculators who might want to drive the krona stronger,” said Anders Ekloef, a currency strategist at Swedbank. “There are clear references to currency interventions in their press release and it seems they are less willing to lower rates at this point. After all, it’s the currency that’s their main problem.”

With a benchmark interest rate already at a historic low of minus 0.35 per cent and several rounds of bond purchases behind them, policymakers are under pressure to consider other measures to live up to their inflation mandate. Underlying inflation has been below the Riksbank’s target since the beginning of 2011 and headline price growth has hovered below zero for much of the past three years.

Though Sweden has resorted to extreme policy measures, its negative rates and quantitative easing have been overshadowed by far more dramatic monetary stimulus programs from the European Central Bank. Against the Euro, Sweden’s krona has strengthened about 4 per cent over the past 12 months.

“If the exchange rate strengthens earlier and more rapidly than forecast, it will be more difficult to push up inflation towards the target,” Governor Stefan Ingves said on Dec. 30. “The Riksbank is therefore highly prepared to intervene on the exchange market whenever we deem it necessary.” The comments pushed the krona off a nine-month high versus the Euro.

Swedbank sees the krona strengthening toward 9.05 per Euro in the first quarter, “but the Riksbank won’t let it gain too fast, as it has done now,” Ekloef said. According to Nordea analyst Martin Enlund, the unscheduled statement suggests the krona’s persistent strength has led to a state of alarm inside the Riksbank.

The Dec. 30 statement signals that “currency interventions could be higher on the agenda than previously expected,” according to Carl Hammer, SEB’s chief foreign-exchange strategist, and Olle Holmgren, an economist at the Stockholm- based bank.

The krona is also appreciating amid signs that Sweden’s economic growth is accelerating. The National Institute of Economic Research projects gross domestic product will expand 3.9 per cent this year.

Citigroup says the krona’s strength “makes some sense” against the backdrop of strong economic data.

But there’s “limited profit potential in the immediate future, given Riksbank threats of intervention south of 9.10,” said Josh O’Byrne, a strategist at CitiFX. The US bank sees Sweden’s currency trading at about 9.20 to 9.30 against the Euro.

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