The Swedish krona continues to trade at impressive levels
across the exchange rates. The krona has been boosted by an ongoing recovery in
market confidence, driven in particular by some key breakthroughs in the
eurozone. This confidence has fed into sustained appetite for higher-yielding
currencies like the SEK.
The key development from Europe this summer has been the
ECB’s pledge to provide unlimited bond-purchases for peripheral eurozone countries
like Spain and Italy, whose soaring borrowing costs have been a major feature
this year. The ECB’s pledge has already had a very positive impact on eurozone
bond yields and has eased some of the more immediate concerns that the debt
crisis may spiral out of control before EU leaders can react. The improved
global sentiment has been given another boost by the German Constitutional Court’s
approval of the European Stability Mechanism, which is to be the eurozone’s
permanent bailout fund. While the issue of firepower is by no means solved, the
eurozone’s ability to respond to Spain and Italy’s refinancing needs has
certainly improved.
Sentiment towards the Swedish economy remains broadly
positive, which isn’t surprising given the outstanding Q2 GDP figure released
in late July, which smashed forecasts. 1.4% quarterly growth is probably more
than most G10 economies can hope to achieve throughout 2012 as a whole. Domestic
consumption remains in good shape and the Swedish export sector’s continues to
stand up pretty well in the face of deteriorating growth and demand in the
eurozone. However, there has been some recent economic weakness that may
persuade many investors to give up on hopes for any further SEK rallies.
GBP/SEK Outlook
The situation in the UK has been fairly grim this summer, with
data confirming that on top of Q1’s 0.3% contraction, the UK economy contracted
by another 0.5% in the second quarter, with the extra Bank Holiday as a result
of the Queen’s Diamond Jubilee weighing particularly heavily.
However, the UK economy is showing some solid signs of
turning a corner in Q3. Industrial and manufacturing production data has shown
some excellent growth, the UK services sector bounced back in July, while the
latest trade balance and labour statistics have also been very positive. Thanks
in no small part to the London Olympics, there is now a decent chance of a
positive Q3 GDP figure, which should result in some support for the pound.
Also supportive of the pound is the near-term outlook for
Bank of England monetary policy. The BoE appears content to sit it out and wait
for the effects of both its Funding for Lending programme and its last QE
top-up, before easing monetary policy any further. Conditions in the eurozone
have eased up, while domestic activity has improved in the past couple of
months, which should ensure there is no more QE until November at the very
earliest.
There is no doubt that the Swedish spent Q2 in rude health
but there have been some mildly concerning figures released of late. August saw
a surprise rise in unemployment to 7.2% from 7.0% and a very weak manufacturing
growth figure, while the latest industrial orders data suggests there could be
some further weakness down the line. However, it was weak Swedish inflation,
not tame growth figures, which prompted the Riskbank to cut its base rate by
0.25% to 1.25% in September. While
Swedish krona’s interest rate differential has now been eroded, the market’s
response was quite muted.
This pair posted fresh multi-month lows in the past
fortnight, amid a series of positive eurozone developments. However, support
levels have kicked in at 10.5, which has coincided with stronger UK figures and
a slight loss in momentum in Sweden. These factors should combine to send
GBP/SEK pair higher off these current lows in the coming month. 10.7-10.8 is a
decent target area.
Richard Driver
Currency Analyst
Caxton FX
