Sweden's Riksbank will start limiting the means it’s been using to fight deflation, just after another round of easing this week to counter stimulus signaled by the European Central Bank, says Nordea
Bank, Scandinavia’s biggest lender.
SEB AB, Scandinavia's top forex trader, says changing the course will send the krona surging 12 percent against the euro by March, erasing the declines caused by trimmed interest rates and bond purchases three times over.
There is a view that Swedish officials, unlike their peers from Frankfurt, can stand a stronger currency as the economy demonstrates the first signs of confident growth in consumer prices.
They cannot keep following the ECB, analysts at SEB say, as at the end of the day it will bring a market positioned to short in krona to start to buy back
the krona.
The average estimate by Bloomberg puts the Swedish currency more than 1 percent stronger by the end of the first quarter at 9.28 per euro - the strongest expected rise among major currencies after the dollar and pound.
Nordea says that although the ECB chief’s remarks that more easing may come as soon as December make it more probable that Swedish officials will slash interest rates or expand their own quantitative-easing program when they meet on Wednesday, they’ll still attempt to tighten policy next year. At least, Sweden will do it before the euro area does. The bank sees the krona rising to 9.3 per euro by June and 9.1 by the end of 2016.
Krona's dramatic plunge
In December 2014 the krona hit a 4,5-year trough against the euro, and it was the second worst-performing major currency vs dollar and euro in 2014. The situation got better after the Riksbank launched negative interest rates and the Quantitative Easing program in February. But the currency is still four percent lower since the country began to cut borrowing costs four years ago.
After years scraping through the worst deflation in the Group of 10, Sweden has logged four increases in annual consumer prices in 2015.
September’s 0.1 percent rate is still well below its 2 percent target, but the central bank forecast last month it would match its goal next year. This comes amid pressure of officials to raise interest rates to pop a bubble in the housing market.
Sweden's peers in the euro area cannot boast of inflation, which is going in a reverse direction. BNP Paribas considers Wednesday will bring no rate-cut, as inflation persists, and it will inspire policy-makers to tighten the money supply in 2016. The lender says it’s using the options market to bet the krona will climb to 9 per euro by August.
