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Market Analysis

Fundamental Analysis: Krona’s Fresh Two-Year Lows

February 22, 2019
BY Michael Stark

The Swedish krona has tumbled to new two-year lows against several major currencies this week. One of the key drivers of the move downward by SEK was the lower figure for inflation on Tuesday. The minutes released today of the Sveriges Riksbank (SR)’s latest policy meeting have given a degree of support, though.

USDSEK’s 9.41 on Tuesday is the largest value for this symbol since December 2016. The euro also reached five-month highs at 10.62 kr. Most surprisingly, the embattled pound traded at very nearly 12.24 kr yesterday afternoon. This is sterling’s highest level against the krona since the Brexit referendum.

‘Crunch time’ for the krona

Tuesday’s inflation data from Sweden came in at 1.9%, missing expectations by about 0.3%. This is the lowest monthly figure for annual Swedish inflation since May 2018, and SEK’s reaction to the news was an immediate sharp drop. However, it is rather difficult to justify the krona’s strong losses this week by reference only to this statistic.

Monetary policy is tightening in Sweden, albeit slowly, after December’s rate hike, the first since mid-2011. Meanwhile, the slight decline in inflation would not usually be enough for such a sudden collapse in the price of SEK. This is not least because Swedish inflation has historically been among the lowest and most stable in the world.

Looking deeper than this yields some unusual conclusions, though. The natural implication of the Phillips curve for Sweden is that higher effective utilisation of resources – mainly timber and iron ore – should lead to higher inflation. It is difficult to explain why the opposite is happening. However, the SR’s hypothesis as set out in detail on the bank’s website is reasonable. Monetary policy can be a stronger factor than utilisation of resources in influencing inflation.

The release this morning of minutes from the SR’s meeting on February 12 was somewhat positive for SEK. Emphasis is on the SR’s continuing intention to hike rates again in the second half of the year, bringing the repo rate out of negative territory to 0%. This is conditional on the economic outlook as well as inflation remaining broadly stable, which appears to be the case for now.

Bumper crop of Swedish data next week

Given the nature of the comments in the Riksbank’s minutes, next week is a very important one for the krona. No less than 12 releases are due between Wednesday and Friday from Sweden, with each one likely to have some effect on the SR’s future plans.

The most important figure is Thursday’s GDP growth rate at 08.30 GMT. Both annual and quarterly growth rates are expected to pick up by about half a percent. If this forecast is accurate, a bounce might well be in store for SEK.

Apart from Swedish data and monetary policy, SEK traders are also watching general events in currency markets. President Trump’s meeting with Vice Premier Liu He this afternoon is a very important event in ongoing trade negotiations.

Data-driven bounce appears possible

FX News’ analysts expect a small bounce for the krona in the early part of next week as markets continue to digest today’s release from the SR. From Wednesday, though, volatility will almost certainly be higher due to the number and importance of Swedish data.

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