Helaba Research

FX FOCUS

24 July 2014

Swedish krona
AUTHOR
Christian Apelt, CFA
phone: +49 69/91 32-47 26
research@helaba.de

EDITOR:
Claudia Windt
PUBLISHER:
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
Helaba
Landesbank
Hessen-Thringen
MAIN TOWER
Neue Mainzer Str. 52-58
60311 Frankfurt am Main
phone: +49 69/91 32-20 24
fax: +49 69/91 32-22 44

The euro has proved a big loser over a one-month period. The Scandinavian currencies
depreciated even more, and the Russian ruble lost the most ground.
The Swedish krona has weakened noticeably in 2014. The weakness can be explained with
the robust rate cut by the Riksbank. To be sure, over the short term the recovery potential
of the krona is limited. However, compared to the euro zone, Sweden shows markedly
higher growth, along with a few structural advantages. That is why in 2015, monetary policy
should once again provide tailwind for the Swedish krona, and the euro-krona exchange
rate should decline accordingly.
Helaba Currency Forecast

Euro performance on a month-over-month basis

% vs. euro compared to the previous month (from 06/24 to 07/23/14)

US dollar

1,1

Japanese yen

1,5

British pound

1,4

Swiss franc

0,1

Canadian dollar

1,2

Australian dollar

2,0

New Zealand dollar

1,4

Swedish krona

-0,6

Norwegian krone

-0,3

Czech koruna

-0,1

Polish zloty

0,5

Hungarian forint

-0,4
This publication was very
carefully researched and
prepared.
However,
it
contains
analyses
and
forecasts regarding current
and future market conditions
that are for informational
purposes only. The data is
based on sources that we
consider reliable, though we
cannot
assume
any
responsibility for the sources
being accurate, complete,
and
up-to-date.
All
statements in this publication
are
for
informational
purposes. They must not be
taken as an offer or
recommendation
for
investment decisions.

Russian ruble

-2,2

3,6 Turkish new lira

South Korean won

0,4

Chinese yuan

1,6

Indian rupee

1,2
2,3

South African rand

Brazilian real

1,4
2,1

Mexican peso

Core currencies Rest of G10 Currencies of emerging markets

Sources: Bloomberg, Helaba Research

HELABA RESEARCH 24 JULY 2014 HELABA

F X F O C U S SW E D I S H K R O N A

SEK: potential only over the long term

The German yearning for Bullerby has presumably taken hold also of some investors. In the face
of the difficulties in the euro zone, these investors trusted that their money would be safer in
Sweden. But they were largely disappointed, at least as far as the trend in the currency market is
concerned. The Swedish krona proved the weakest of the industrialized currencies in 2014 with a
loss of 4 % against the euro. And the Scandinavian currency was among the losers already last
year.
Krona without a long-term
appreciation trend

From a long-term perspective, the Swedish krona was a profitable investment only in part. The
currency suffered a massive depreciation from the seventies to the beginning of the nineties. The
last twenty years were then marked by stability: thus, the euro-krona exchange rate moved largely
in a range of 8.0 to 10.0. Only during the global financial crisis did the Swedish krona depreciate
drastically, and the exchange rate jumped at times to nearly 12.0. But even within the sideways
range there were phases when investors were able to realize double-digit gains and losses with
the Swedish krona.

Swedish krona only as trading opportunity

Solid growth in Sweden

SEK

% over previous quarter

Sources: Macrobond, Helaba Research

Sources: Macrobond, Helaba Research

Sweden with advantages,

but not without risks

% yoy

The Swedish economy is undoubtedly attractive to investors, especially for those from the euro
zone. The country is politically stable, and public finances have been quite solid at least this
century especially compared to the rest of Europe. The economy is for the most part growing
considerably, even if not exuberantly. Price stability exists. The current account has been running a
surplus for twenty years. However, the global financial crisis has shown that Sweden is vulnerable:
thus, Swedish banks suffered disproportionately, not least because of their foreign engagements.
Moreover, the great importance of the rather cyclical industry like machinery building and
transportation vehicles bears risks: as a result, in response to the global financial crisis in 2009,
Swedens GDP shrank a full 5 %, which was more than in many other industrialized countries.
Export destinations are mostly European countries, along with the euro zone also the UK and the
Scandinavian neighbours.
In spite of certain advantages, the Swedish currency is therefore by no means a safe investment
haven. However, the krona is quite well positioned beyond the crisis phases, especially compared
to the euro. Last year, the Swedish economy grew by 1.6 %. For 2014, the signs point to growth of
well over 2 %. Investments are expanding robustly, and the continuing positive business surveys
argue against a change in this trend. Foreign trade is benefiting from the recovery of the European
economy. Since growing employment and higher wages support private incomes, private
consumer spending is also expanding solidly. In addition, households are showing a growing
willingness to spend, and their level of debt is rising. The main reason for this can be found above
all in the flourishing residential real estate market, and housing prices continue to climb. The
elevated debt level of private households, high by international standards, should be seen critically,
but monetary policy is tending to boost it even further.

HELABA RESEARCH 24 JULY 2014 HELABA

F X F O C U S SW E D I S H K R O N A

In spite of the solid economic development, Swedens central bank made a surprisingly strong cut
in its key rate at the beginning of July, from 0.75 % to 0.25 %. Incidentally, Riksbank Governor
Ingvers voted against this robust move. As the reason for the rate cut, the central bank pointed to
the very low inflation. In fact, inflation is only marginally above the zero mark, and while the core
rates are a little higher, they are still below 1 %. Inflation in Sweden has been hovering around the
zero mark already since the end of 2012. Moderate demand against the backdrop of excess
capacities in the economy overall and strong competitive pressure explain the currently low
inflation. Over the medium term we should expect an acceleration in prices because of the higher
growth. Even the Riksbank assumes a rising inflation in its projections, which posit that the target
level of 2 % will be reached again in 2016.
Riksbank-rate cut to
devalue the currency?

As another argument for the massive interest rate cut, the central bank pointed to the low rates
around the world. It is surely hinting at the new expansionary measures by the ECB. One can see
the Swedish cut as a reaction to the ECB or as a preventive measure to keep its own currency
from appreciating too much. At least the currency market proved the Riksbank right. Thus, the
weakness of the krona this year can be explained above all with Swedens monetary policy. That
the politicians do not want the currency to be too strong may seem understandable. However,
Swedens economy needs no monetary policy stimulus, in fact the real estate market would need a
damper, if anything. Moreover, one can hardly speak of an overvaluation of the Swedish krona.
Adjusted purchasing power parities or real exchange rate indexes suggest a fair or even a low
valuation of the krona.

Swedish krona undervalued, if anything

Swedish rate cut already priced in

Index

SEK

Sources: Macrobond, Helaba Research

Sources: Macrobond, Helaba Research

Sideways over the short

term, but long term
with potential

% points

The interest rate cut has robbed the Swedish currency of its appreciation potential for the time
being. Thus, the interest rate differentials against German bonds point to an appropriate valuation
at the current level of 9.2 krona to the euro. However, even the Swedish central bank posits
interest rate hikes at the end of 2015 in its projections. Should economic growth prove sustainable
and inflation perhaps normalizes more rapidly than projected to date, such a turnaround on interest
rates could even be moved up. At the least, at the current interest rate level the risk-reward ratio is
clearly pointing upward. Since the ECB will tend to become even more expansionary for the time
being, over the medium term various factors argue for a recovery of the Swedish krona. Following
a sideways movement, the euro-krona rate is likely to pull back to 9.0 by the end of the year, and
drop well below that in 2015 with growing interest rate speculations. Investors will need a little
patience for this and possibly also nerves. The Swedish krona was never really a peaceful
currency paradise la Bullerby, and it is not likely to become one any time soon.

HELABA RESEARCH 24 JULY 2014 HELABA

F X F O C U S SW E D I S H K R O N A

Helaba Currency Forecasts

Performance
year to date 1 month
vs. Euro

current*

Forecast horizon at end ...

Q3/2014
Q4/2014
Q1/2015

Q2/2015

(vs. Euro, %)

US dollar

2,1

1,1

Japanese yen

5,9

1,5

137

133

131

126

128

British pound

5,1

1,4

0,79

0,80

0,79

0,78

0,78

Swiss franc

1,0

0,1

1,21

1,25

1,25

1,25

1,25

Canadian dollar

1,1

1,2

1,44

1,39

1,36

1,31

1,31

Australian dollar

8,2

2,0

1,42

1,44

1,42

1,36

1,36

New Zealand dollar

8,1

1,4

1,55

1,55

1,52

1,50

1,54

Swedish krona

-3,9

-0,6

9,21

9,20

9,00

8,80

8,70

Norwegian krone

0,0

-0,3

8,34

8,10

7,90

7,80

7,70

vs. US-Dollar

1,35

1,30

1,25

1,20

1,20

(vs. USD, %)

Japanese yen

3,8

0,5

101

102

105

105

107

Swiss franc

-1,0

-0,9

0,90

0,96

1,00

1,04

1,04

Canadian dollar

-1,0

0,2

1,07

1,07

1,09

1,09

1,09

Swedish krona

-5,9

-1,7

6,84

7,08

7,20

7,33

7,25

Norwegian krone

-2,0

-1,4

6,20 1,57

6,23

6,32

6,50

6,42

US-Dollar vs.

(vs. USD, %)

British pound

2,9

0,3

1,70

1,63

1,58

1,54

1,54

Australian dollar

6,0

0,9

0,95

0,90

0,88

0,88

0,88

New Zealand dollar

5,9

0,3

0,87

0,84

0,82

0,80

0,78

*23.07.2014

Sources: Bloomberg, Helaba Research

HELABA RESEARCH 24 JULY 2014 HELABA