Data has revealed that the Swedish economy took a surprise upturn in the first quarter of this year. This improved domestic economic performance has given the Riksbank the confidence to leave interest rates unchanged for the second consecutive meeting, though there remain calls for another cut within the central bank’s ranks.
A brighter picture in Sweden has coincided with a mild recovery in global equities and risk appetite, in the wake of May’s crisis of eurozone confidence. Greece has managed to form a coalition government and concerns surrounding a messy Greek default and exit from the eurozonehave eased, for the time being at least. Spain’s situation looked capable of spiralling out of control, with the country’s 10-year bond yields setting new euro-area records up above the dangerous 7.0% mark. Some progress has been made with regard to Spain; an agreement has been reached for the bailout of its banks and some unexpected decisions made at the recent EU Summit have eased some short-term concerns.
Whilst market confidence has turned distinctly negative in recent sessions, the positive Swedish data in recent weeks has provided plenty of support for the Swedish krona, suggestive of a strong second half of the year for the Swedish economy. However, we view the risks to market sentiment and developments in the debt crisis to be heavily skewed to the downside. As such we don’t see too much more upside for the krona from here over the next couple of months.
GBP/SEK
After this pair peaked close to 11.50 in mid-May, the krona has rebounded impressively over the past two months. Sterling has struggled against many of the riskier currencies in recent weeks. Global stocks have staged an impressive recovery from their May sell-off and the krona has tracked that bounce inrisk appetite.
Events in the UK have not helped sterling’s cause of late. Growth data has been consistently weak, suggesting there will be no swift bounce back out of the double-dip recession that the UK has found itself in. Data confirmed the UK economy contracted by 0.3% in Q1 and we expect another contraction in UK GDP in Q2. The Bank of England’s response to fading domestic activity has been to introduce yet more quantitative easing, which is of course a negative for the pound. This factor has contributed to GBP/SEK’s poor performance over the past couple of months.
The Riksbank decided to leave its interest rate at the current level of 1.50% in July. Only two votes out of six were in favour of another cut to the Riskbank’s base rate, with the majority satisfied with the upturn in Swedish activity. The Swedish economy grew by 0.8% between Q4 2011 and Q1 2012 and the Riskbank is expecting overall growth of 0.6% this year, up from previous estimates of 0.4%. We have seen some positive figures comes out of Q2 as well;Swedish industrial production rose by an impressive 3.0% in May, while industrial orders rose by 4.5%, which has sparked a good degree of optimism surrounding the Swedish growth outlook.
There remains plenty of reason for caution. Swedish unemployment is rising (up at 4.4% from 4.0%) and the Swedish economy remains very vulnerable to deteriorating eurozone conditions. This second factor will ensure that another interest rate cut later this year is always a possibility, but on balance we expect the Riksbank to hold fire. We don’t see much further downside for this pair and expect a bounce back above the 11.00 mark over the coming weeks.
EUR/SEK
This pair has come under some aggressive selling pressure in the past two months. The risks of economic disaster posed by the eurozone debt crisis are building every monthand this has seen the single currency take another sharp turn for the worse.
The short-term risks posed by Greece have eased now that a coalition government is in place but when the bailout term negotiations commence there is plenty of scope for alarm bells. Concerns over Spain have more than stepped in to fill the void; its banking sector has had to seek a bailout and despite significant progress at the recent EU Summit, Spanish bond yields remain dangerously close to 7.0%.
Investors are still sceptical towards the euro and rightly so – no long-term solution is in sight; the bailout funds are still insufficient, Germany continues to obstruct the introduction of Eurobonds, peripheral borrowing costs remain high and eurozone growth is contracting. Even the progress made at the recent EU Summit has been placed in doubt by the German constitutional court delaying ratification of the ESM changes and the fiscal pact. In addition, the euro’s yield differential has once again been reduced by a 0.25% ECB interest rate cut (to 0.75%) this month, with further monetary easing in the form of another rate cut or cheap loan offering likely this summer.
With the euro losing ground across the board, the SEK is shining out as a safer European alternative backed by stable domestic economic growth and low debt levels. There are plenty of rumours that the SEK is a popular target with the Swiss National Bank as it continues its project of recycling the euros it acquires whilst weakening the CHF.
This pair is trading at an 11 ½ half year low; whilst we do not expect any major progress in the eurozone over the next couple of months, we do expect to see this pair to benefit from a minor bounce after its sharp recent decline. The SEK remains vulnerable to major panic in the eurozone. A bounce up towards 8.80 over the coming weeks looks a good bet.
USD/SEK
As one of the safest currencies available, the US dollar has been a strong performer since early May, which has helped this pair continue the uptrend that has played out over the past year. Eurozone fears have reached new heights and the safe-haven dollar always strengthens in this environment.
The US dollar has not been without its own domestic issues though; the US economy slowed down sharplyover the first half of 2012, the Q1 GDP figure was revised down to 1.9% (y/y) from 2.2%. Consistently soft figures out of the US labour market in particular have ramped up speculation that the US Federal Reserve will announce a third round of quantitative easing (QE3). Regardless of the risks of QE3 this year though, we envisage enough safe-haven demand for the dollar to outperform.
We envisage plenty more gains for the US dollar in the second half of this year, with USD/SEK heading back up towards it recent highs around 7.30 in the coming few weeks, with fresh highs above 7.50 likely towards the end of Q3.
NOK/SEK
The Norwegian economy continues to shine, having grown by 1.1% in the first quarter of this year. The latest updates in terms of Norwegian manufacturing and industrial production were positive and retail sales growth was particularly impressive in May. There is no doubt that the Norwegian economy is proving extremely resilient to the global and eurozone economic downturn that has developed this year. Rising investment in Norway’s lucrative oil sector is providing steady support to growth and with forward-looking economic surveys looking positive;the Norges Bank has revised its GDP forecasts upward to 3.75% from 3.25% for 2012.
Clearly the Norges Bank has been eager to highlight the external threats to the Norwegian economy, most notably from the eurozone debt crisis. Indeed it stated in June that “turbulence and weak growth prospects abroad suggest the key policy rate should be kept on hold.”However, the Norges Bank is one of the few global central banks not inclined towards easier monetary policy and we currently expect an interest rate hike from the Norges bank around the turn of 2013. Of course, this will be highly sensitive to developments in the eurozone and how drastically this affects Norwegian exports.
The Norwegian krone is still a commodity currency and although Norway’s strong economic fundamentals have to a large extent offset the effects of declining oil prices on the krone, the slide has still weighed on the currency. Since the uncertainty triggered by the Greek elections in early May, the price of Brent crude has declined by almost 20% from $120 to under $100 per barrel.
This factor has contributed to a sharp downward correction in the NOK/SEK rate, dragging it down from two-year highs above 1.20 to current levels just above 1.14. We consider these levels to be much too low and are confident that we will see a strong bounce off these lows up towards 1.18 over the next few weeks.
Richard Driver
Analyst – Caxton FX
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