The Swedish krona in sheep’s clothing
The Swedish krona has dived so deep that using sports references it is the opposite to a GOAT on the foreign exchange market.
Cruel Summer
The summer was cruel for the Swedish krona. Since the beginning of the year, the krona has weakened by over 6% against the euro, and the year-on-year decline is over 8%. Faith in the krona has been tested, as Sweden is plagued not only by problems on the housing market, but also by the cooling international economy, which impacts our neighboring country as is typical for a small value economy. As the graph shows, Sweden is in the group that should be worried about stagflation risks, as inflation has surprised upwards and the economic growth picture downwards. Next year, Bloomberg’s consensus estimate for inflation has risen to around 3%, while the economic growth outlook has fallen close to zero. This is a toxic combination also in the currency market.
The Central Bank of Sweden Riksbanken has raised its interest rate, which typically also provides support to the krona. This time, however, the pace of some central banks has been faster, e.g., the ECB has raised its interest rates from zero to 4.5%. At Riksbanken, interest rate hikes continued at the September meeting with a +25 basis point change to 4.0%. Now, many expect the hikes to be over but there is still uncertainty in the air concerning the future. One of the questions is also how much the weak krona is harming inflation estimates, as a weak currency proportionally increases import prices in the economy. It would be absurd if the central bank would be forced to raise interest rates because of the krona exchange rate.
In currency forecasts, the krona is not shedding its sheep’s clothing for a while. In Bloomberg’s median estimate, the EUR/SEK rate is expected to fluctuate around SEK 11 (on Monday the rate was SEK 11.7), but is mostly above it, until 2027.