Swedish krona bears are an admirably hardy bunch but everyone has their limit. The currency has gone nowhere fast this year, generally hovering around Skr9.55 against the euro in a relatively sleepy pattern. Nothing to see here. After all, the highly inflation-focused central bank has an allergy to a stronger currency, and the benchmark interest rate is a punishing 0.5 per cent below zero.
That drowsy calm in the krona has persisted despite an economy growing at its fastest pace since 2010. Data in late July showed that the economy grew by 4 per cent on the year in the second quarter. The market reaction: a Nordic shrug.
But now, finally, just like the sudden change of heart that hit the Swiss franc last month, there is some clear evidence that traders are starting to pay attention. Underlying annual inflation came in at about 2.4 per cent in July, above the Riksbank’s 2 per cent target for the first time since 2010. Even the central bank — by its own admission, not the world’s greatest forecaster of domestic data — had predicted a rate of just 1.8 per cent.
And we have lift-off! The euro slumped by 0.8 per cent against the soaring krona on Tuesday, hitting a low close to SKr9.47 and leaving the previously flat-packed Swedish currency at its strongest level since March. SEB thinks this has further to run — down to SKr9.20, in fact, in what could be a very rapid move. Foreign speculators have been far too negative on the currency up to now, the bank says, noting that they have been net sellers for eight of the past 10 weeks this summer for higher-yielding bets elsewhere.
The obvious trigger for a serious rally would be a change in tactics from the Riksbank, akin to European Central Bank chief Mario Draghi’s euro-boosting Sintra speech on the return of reflation.
Of course the upbeat inflation rate for July could prove to be a blip. But krona bears should be getting hot under the collar. “It is very reasonable to expect increasing speculation that the time is right cautiously to start to normalise monetary policy — a process [that will be] very krona-positive,” says Carl Hammer at SEB.
The currency, he notes, has “asymmetric upside” risk. That is FX analyst-speak for “stand back, it’s gonna blow”.