Is Sweden concerned about the krona?

The Swedish krona is somewhat firmer today but it is the biggest loser among the major currencies this week. It has lost about 2.3% against the dollar and 2.1% against the euro. According to Bloomberg, this is the single biggest weekly decline of the krona against the euro in about a year and a half.

There were two factors that have weighed on the krona this week. The first was the central bank shifted toward a move dovish stance, lowering the trajectory of its rates outlook, opening the door to a rate cut, which at least one local bank is saying is likely in July.

The recent economic data have been mixed. The manufacturing PMI was up more than expected at 52.1 from 50.9, but the service PMI collapsed to 47.3 from 54.6. February industrial production rose 0.5$, which was half of what was expected, though the January series was revised to show a 1.1% decline rather than the 2% decline initially reported. Industrial orders rose 3.5%, offsetting in full the decline in January.

The whiff of deflation seen with negative prints on the year-over-year measure of CPI in November-December 2012 and in February, returned to flat in March. Given that the monthly prints last year in May through July were negative, the risk of a return of deflation is unlikely.

The second weight on the krona has been what seems to be a reversal of the past policy of “benign neglect”. Recall that many observers, caught up in the “currency war” rhetoric, argued that every one wants a weaker currency. Although we have harangued against confusing the metaphor with reality, Sweden an obvious exception. The Riksbank governor indicated in February that the krona’s strength was a positive development and encouraged businesses to get used to it.

The government does not appear as sanguine. Finance Minister Borg yesterday expressed concern that the krona’s strength could further undermine Swedish growth. Sweden, like Germany, Switzerland, Finland and China, exports 40-50% of GDP. Borg slashed next year’s growth forecast to 2.2% from 3% on April 15. The Riksbank pushed out its anticipated tightening two days later.

The krona is poised to correct higher against the US dollar in the week ahead. We look for the dollar to be pushed lower from the SEK6.50 area currently to SEK6.41-SEK6.43 in the near-term. The euro is looking more resilient against the krona. The euro-SEK chart has a downtrend line drawn off the mid-Dec high and the highs from the second half of January that comes in now near SEK8.50. This offers initial support but additional support is seen near SEK8.48 (currently ~SEK8.516).

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