In a Disappointing Europe, Sweden Stands Out

Europe is engulfed in a financial crisis that is also becoming a political crisis.  Sweden stands out as an exception and we affirm our expectation of the krona’s out performance in period ahead.

Sweden’s economy contracted 5.3% last year but has rebounded smartly this year.  Q3 GDP was reportedly earlier today and at 2.1% quarter-over-quarter was nearly twice as strong as the consensus forecast and Q2 figures were revised up a touch.  From a year ago, the Swedish economy is 6.9% larger.  Adding to the positive news stream was the Oct retail sales report.  The 0.8% rise was twice the consensus.   The point is that not only is Sweden reporting robust data, it is surprising the market to the upside.

This is serving to shift expectations decidedly in favor of a rate hike by the Riksbank at the next meeting (Dec 15) and likely followed by another rate hike in the middle of Q1.  The Riksbank expects the repo rate to average 1.3% in Q1 11.  Currently it is at 1%.  It expects the repo rate to average 2% in Q4 11.   At this juncture, the main risk to a Riksbank hike next month is if there is a complete meltdown in the euro and the international variables might steady the Riksbank’s hand.

Since mid-Sept the euro had corrected higher against the krona. It repeated tried and was turned back from the SEK9.40-SEK9.42 area.  Today it the euro is testing the SEK9.20 area.  The multi-year lows were set in Sept just below SEK9.10.  We suspect that the euro is headed back there and probably toward SEK9.0.  International asset managers will be drawn to the Swedish bond market as an alternative to German bunds and the equity market is among the best performers in the G10.  The dollar is trading at 2-month highs against the krona.  Technically the risk appears to be another 1% dollar gain toward SEK7.12.  However, for those inclined to try picking a dollar top, the krona may be a more attractive candidate than the euro.

Sweden is only tangentially involved with the European financial crisis.  It has loaned money to Latvia and Iceland and now Ireland (600 mln euros), but there seems to be little will at this juncture to do any more.