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Helaba Research FX FOCUS 1 December 2016 Swedish krona AUTHOR Christian Apelt, CFA phone: +49 69/91 32-47 26 [email protected] EDITOR: Claudia Windt PUBLISHER: Dr. Gertrud R. Traud Chief Economist/ Head of Research Helaba Landesbank Hessen-Thüringen 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 US dollar was able to appreciate against the euro. The British pound advanced even more. The biggest losers were the Japanese yen and a few emerging market currencies, such as the Turkish lira or the Mexican peso. The Swedish krona has been one of the clear losers in 2016. The continuing expansionary monetary policy by the Riksbank is weighing on the currency. However, economic growth in Sweden is proving quite robust. While inflation is still too low from the perspective of the central bank, it is slowly rising. The phase of an ever more expansionary monetary policy should draw to a close in 2017. And since the Swedish currency is noticeably undervalued as it is, the krona has considerable potential for recovery. Helaba Currency Forecasts Performance on a month-over-month basis % vs. euro compared to the previous month (from 11/01 to 11/30/16) US dollar 4,4 Japanese yen -5,0 6,6 Swiss franc 0,1 4,0 Canadian dollar Australian dollar 0,8 2,9 New Zealand dollar Swedish krona 1,4 Norwegian krone 0,6 Czech koruna -0,1 Polish zloty -3,4 Hungarian forint -1,5 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. British pound 3,1 Russian ruble Turkish new lira -5,5 South Korean won 0,8 2,4 Chinese yuan 0,8 Indian rupee 0,8 South African rand -0,5 -2,5 Brazilian real Mexican peso ■ Core currencies ■ Rest of G10 ■ Currencies of emerging markets Sources: Bloomberg, Helaba Research HELABA RESEARCH · 1 DECEMBER 2016 · © HELABA 1 F X F O C U S SW E D I S H K R O N A SEK: downtrend coming to an end Political events like the Brexit vote or the election of Trump dominated the year also in the currency markets. Presumably for that reason, as well, little attention has been paid to Sweden’s currency. And this even though the krona posted a striking development: after the British pound, it has been the weakest among the major currencies in 2016, even though Sweden’s economy grew very strongly. The euro-krona exchange rate jumped briefly over the 10.0 mark for the first time since the beginning of 2010. Aggressive monetary policy depresses Swedish krona While growth in Sweden has been robust already since 2013, the krona has been in a downtrend. The weak currency was surely not the economic driver, since foreign trade overall made a slightly negative contribution to growth. The main driver behind the depreciation of the currency has been Sweden’s own central bank. The Riksbank cut its key rate even more than the ECB into negative territory. In addition, Sweden’s central bank launched a considerable bond-buying program. Inflation slowly normalizing Economy remains robust % yoy Index Sources: Macrobond, Helaba Research Sources: Macrobond, Helaba Research % yoy The Riksbank justified its aggressive monetary policy by pointing to the excessively low inflation, which remained consistently below the 2 % target in recent years. The core inflation, too, was below that level, even though the trend is by now pointing upward. In conjunction with the recovering energy prices, inflation should rise in 2017, though still fall short of the target. Continuing strong growth On the heels of 4 % growth last year, Sweden’s economic dynamism slowed in 2016, as expected. At times, some of the sentiment indicators were even pointing to a pronounced slowdown in growth. However, the economic barometers climbed again most recently. Sweden’s GDP should expand at a rate of 3 % in 2016, and still at a solid 2.5 % in the coming year. Monetary policy as a reaction to the ECB The outlook on growth and by now also on inflation hardly justifies the exceedingly expansionary monetary policy. However, the measures taken by Sweden’s central bank must be seen within the context of the ECB and the other central banks. The interest rate cuts and asset-buying programs by the ECB tend to depress the euro and thus put appreciation pressure on currencies like the Swedish krona. That would lower import prices and inflation overall. Even though these effects would be rather temporary, the Riskbank would not be happy about them. Sweden’s monetary policy can therefore be understood as a response to the ECB or as a preventive measure. The export economy would probably not suffer massively from a strengthening of the krona. The real exchange rate indexes point to a significant undervaluation. The current account is posting stable surpluses of around 5 % of GDP. And compared to many other industrial countries, the public finances look fairly healthy. HELABA RESEARCH · 1 DECEMBER 2016 · © HELABA 2 F X F O C U S SW E D I S H K R O N A Swedish krona very favourably valued Interest rate difference points to lower euro-krona rate Index SEK Sources: Macrobond, Helaba Research Sources: Macrobond, Helaba Research Clear recovery potential for the krona % points Globally speaking, the trend to an ever more expansionary monetary policy seems to be coming to an end; even the ECB will presumably extend only the timeline of its bond purchases. In the face of a key rate of -0.5 %, the road to normality is a very long one for Sweden’s central bank. The Riksbank is not likely to make any more interest rate cuts. In fact, it could initiate a turnaround over the course of 2017. With a view to 2018, at the latest, one should expect rate hikes. The interest rate differences vis-à-vis euro bonds will presumably develop in favour of Sweden. And since this spread hardly reflects the rise in the euro-krona exchange rate, to begin with, there is considerable appreciation potential for the krona. The euro-krona rate should decline in the direction of 9.0 by the end of 2017. Helaba Currency Forecasts Performance year to date 1 month vs. Euro current* Q4/2016 Forecast horizon at end ... Q1/2017 Q2/2017 Q3/2017 (vs. Euro, %) US dollar 2,6 4,4 1,06 1,10 1,15 1,15 1,15 Japanese yen 7,8 -5,0 121 115 115 115 121 British pound -13,0 6,6 0,85 0,90 0,90 0,90 0,90 Swiss franc 1,0 0,1 1,08 1,08 1,08 1,08 1,10 Canadian dollar 5,7 4,0 1,42 1,49 1,55 1,53 1,52 Australian dollar 4,0 0,8 1,43 1,51 1,53 1,49 1,47 Swedish krona -6,2 1,4 9,77 9,50 9,30 9,20 9,10 Norwegian krone 6,4 0,6 9,03 9,00 8,90 8,90 8,80 Chinese yuan -2,8 2,4 7,30 7,54 7,94 7,94 7,99 vs. US-Dollar (vs. USD, %) Japanese yen 5,0 -9,0 114 105 100 100 105 Swiss franc -1,5 -4,1 1,02 0,98 0,94 0,94 0,96 Canadian dollar 3,0 -0,3 1,34 1,35 1,35 1,33 1,32 Swedish krona -8,6 -2,9 9,23 8,64 8,09 8,00 7,91 Norwegian krone 3,7 -3,6 8,52 8,18 7,74 7,74 7,65 Chinese yuan -5,7 -1,8 6,89 1,57 6,85 6,90 6,90 6,95 -15,1 2,1 1,25 1,22 1,28 1,28 1,28 1,4 -3,5 0,74 0,73 0,75 0,77 0,78 US-Dollar vs. … British pound Australian dollar (vs. USD, %) *30.11.2016 Sources: Bloomberg, Helaba Research HELABA RESEARCH · 1 DECEMBER 2016 · © HELABA 3