Swedes in Krona Trap Commerzbank Says Has No Escape: Currencies

By Lucy Meakin

As Sweden’s central bankers gather for their monthly policy meeting, traders are concerned they’re running out of ways to weaken the krona and end the deflation afflicting the economy.
If, as economists expect, policy makers cut interest rates tomorrow, they risk pushing up Sweden’s record consumer-debt burden. Do nothing, and the krona rally that’s taken hold as the European Central Bank ramps up its stimulus may accelerate.
“They don’t have much ammunition,” Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt, said in an Oct. 24 phone interview. “Either they have to accept a stronger currency, which would really be problematic because inflation is
already very, very low, or they have to accept that the debt situation might even become worse. There’s no way out.”
Sweden’s currency has climbed 0.3 percent versus a basket of nine major peers in the past month, extending a September rally that ended the longest run of losses since the nation’s 2009 recession. Strategists surveyed by Bloomberg anticipate gains versus the euro through next year as ECB rate cuts and bond purchases send money fleeing the 18-nation currency.

Retracing Decline

The krona has appreciated 1.8 percent since weakening to an almost three-year low of 9.3887 per euro after Sweden’s July rate cut, and traded at 9.2201 as of 10:22 a.m. in London. The currency ended six straight months of losses to strengthen in August and September.
That’s no help to an economy trying to end deflation. Swedish consumer prices tumbled 0.4 percent in September from a year earlier, an Oct. 14 report showed. Riksbank Deputy Governor Per Jansson said ECB rate cuts are partly to blame and warned a policy response may be necessary.
Commerzbank expects Sweden’s central bank to lower its benchmark interest rate by 0.1 percentage point tomorrow to 0.15 percent, while the median estimate of economists surveyed by Bloomberg is for a reduction to 0.1 percent. That would still be higher than the ECB’s 0.05 percent main refinancing rate.
Because Swedish officials have limited room to maneuver on rates, they’ll probably consider a Switzerland-style currency cap to limit the krona’s gains versus the euro, according to HSBC Holdings Plc.

Cap ‘Sensible’

“When faced with rather limited policy options to spur inflation, it’s imperative that the exchange rate doesn’t make life even more complicated,” Daragh Maher, a strategist at HSBC in London, said in an Oct. 23 interview. “If the krona begins to strengthen markedly against a weaker euro, then putting in a floor for damage limitation becomes a sensible option.”
The krona’s gains versus a basket of peers tracked by Bloomberg Correlation-Weighted Indexes this past month follow a 0.6 percent advance in September, which snapped a six-month losing streak.
Policy makers don’t target a specific exchange rate, Riskbank spokesman Tomas Lundberg said on Oct. 24. He declined to comment on the rate decision or other potential policy measures, and said questions regarding a currency ceiling should be posed to Governor Stefan Ingves after the meeting, which starts today.
Talk of a euro-krona peg is “extremely far-fetched,” according to Carl Hammer, the chief foreign-exchange strategist at SEB AB, Sweden’s biggest currency trader. He expects the central bank to instead introduce a policy where rate increases would be dependent on meeting inflation targets.

‘Outside Pressure’

“Forward guidance would make clear that this is a zero-interest-rate-policy currency for another one to two years’ time,” Stockholm-based Hammer said Oct. 24 by phone. “That will curb any speculation the Riksbank will hike, and limit the outside pressure” from ECB easing, he said.
SEB and HSBC both see the krona strengthening about 2 percent to 9 per euro by the end of 2015, while Commerzbank predicts a level of 8.9. The median of 21 strategist estimates compiled by Bloomberg is for a gain to 8.95.
The issue with lower rates, though, is that Swedish consumers may be encouraged to increase their unprecedented debt load. Households already owe their creditors about 175 percent of their disposable income, the central bank estimates.
The krona was among the biggest beneficiaries in 2010 as concern the currency bloc would break up roiled markets, climbing 14 percent versus the euro, the fifth-biggest advance among 16 major peers tracked by Bloomberg.
Strategists say Sweden can’t risk a repeat performance, even if it means being dragged into the latest round of the so-called “currency wars.” Brazil Finance Minister Guido Mantega coined the term four years ago to describe competitive exchange-rate devaluation to boost economies.
“At a time where there are very credible deflation risks, they certainly don’t want the krona to start appreciating again,” Neil Mellor, a currency strategist at Bank of New York Mellon in London, said by phone on Oct. 23. “They’ll have to fight fire with fire. It’s a currency war, it’s that simple.”