Swedish krona sinks to crisis-era milestone

21/11/2017

By Nicholas Megaw

The Swedish krona weakened past the SKr10-per-euro milestone for only the second time since the financial crisis on Tuesday, weighed down by a dovish central bank and investor jitters about the local housing market.

The krona set a low of SKr10.016 per euro, before recovering slightly to 9.95. Since the start of September it has weakened from 9.45. The currency remains vulnerable as traders flag disappointing data on inflation — year-on-year inflation eased from 2.3 per cent to 1.8 per cent in October — and worries about a potential downturn in the housing market.

Property prices have begun falling after a decades-long rally, prompting analysts at Moody’s this week to warn that a larger correction could spark a broader economic slowdown.

Concerns about the housing market are weighing on the exchange rate by making it less likely that the Sveriges Riksbank will risk raising interest rates, which would make mortgages more expensive. Along with weak inflation figures, investors see a reduced chance that the Riksbank will bring an end to its long-running monetary stimulus programme of bond-buying and negative interest rates.

Local bank SEB on Tuesday said it expected average prices to fall between 5 per cent and 10 per cent from their peak by the middle of next year. However, it said it would take a fall of between 15 per cent and 20 per cent to seriously hit the broader economy.

Moody’s analysts supported the view of Sweden’s main lenders that their conservative mortgage books would limit some of the damage from any downturn, noting that a “substantial correction would lead only to limited losses on mortgages, as the banks benefit from a range of safeguards”.

The krona briefly passed the symbolic level of 10 per euro last year, but has traded beyond that level for an extended period only during the depths of the financial crisis. In contrast, Sweden today has one of the fastest-growing economies in the developed world, with the central bank forecasting growth of 3.2 per cent for this year.

SEB — like many banks — has long suggested the krona is undervalued on a fundamental basis, given the strength of the broader economy. But analysts at the bank said they expected the currency to remain weak “for quite some time”, with serious strengthening unlikely before the second half of next year.

“There is a short-term risk of an even weaker krona. The Riksbank holds the key to letting the krona appreciate towards 9.20 per euro, (our equilibrium estimate), but as long as the ECB is the anchor of Swedish monetary policy there is not enough support to attract buyers again,” said the bank.

The Riksbank is due to release its quarterly update on the Swedish economy’s financial stability tomorrow.

Sweden’s slumbering borrowing costs — the central bank’s benchmark rate of minus 0.5 per cent is one of the lowest in the world — has also made the krona attractive for carry traders, who can sell krona to fund investments in higher-yielding currencies, weakening the currency.

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