Swedish krona in line of fire amid Brexit

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The Swedish krona is ranked as the third weakest currency in a Brexit scenario after sterling and euro, according to analysts.

By Tanzeel Akhtar

Violent swings in the Swedish krona are expected in the immediate aftermath of the Brexit vote, say analysts, as elevated positioning exacerbates the currency’s risk-on/risk-off status.

Swedish bank SEB forecasts in a note released on Tuesday: "EUR/SEK will trade to 9.25 (from 9.35) should UK vote Remain. A Leave vote will initially weaken SEK against EUR to 9.45, but EUR/SEK is expected to be back at 9.37 again a week after the referendum."

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Carl Hammer, SEB

SEB’s chief currency strategist Carl Hammer adds: "The latest moves [weaker SEK] are reflective of positioning squaring ahead of the Brexit vote. The SEK will weaken initially after a Brexit, but appreciate relatively soon after." 

In a note released on Monday by Capital Economics’ Jack Allen, the European economist writes Brexit could have significant implications for Sweden. Historically, the krona has weakened during periods of concerns about the global economy, but market sentiment could quickly swing in its favour.

"On balance, a weaker currency would probably be seen as a good thing by policymakers at the Riksbank – a Brexit would raise inflation from current low levels," he states. "But it is possible that the krona might rise, perhaps if investors thought that Sweden was less exposed than most to Brexit.

"In this case, we think the Riksbank would resort to foreign-exchange intervention to stop the krona from rising too far and putting a further dampener on inflation." 

Inflation target

SEB’s Hammer explains that the Riksbank ideally wants higher inflation and a somewhat weaker SEK, which would help it to reach its 2% inflation target, but even a Brexit will not weaken SEK sufficiently on its own.

"From a growth perspective, Sweden does not need a weaker SEK as the currency is already 5% undervalued and GDP is driven by domestic factors rather than external trade," he says.

Jameel Ahmad, vice-president of corporate development and market research at ForexTime (FXTM), says, as the Swedish economy is plagued with low levels of inflation, a weaker currency would raise imported price pressures.

"Most expectations are, however, that the Swedish krona should currently continue to remain weak in the medium and longer term," he adds. 

 

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Source: SEB


Hammer believes many domestic exporters and institutions are looking to buy SEK on weakness, and macro funds are still interested in buying SEK on Sweden outperforming most other countries, in GDP terms. 

"If the UK makes a Brexit, we would raise our EUR/SEK profile some 10 to 20 öre higher, but it would still point lower over the next one to two years after an initial spike to 9.50," says Hammer. "So [year-end forecasts for EUR/SEK] Dec-16 would be raised from 9.00 to 9.20 and Dec-17 from 8.70 to 8.80."

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Jameel Ahmad,
ForexTime

In contrast to Hammer, FXTM’s Ahmad explains there is a concern the krona could strengthen in the aftermath of the EU referendum if investors decide to cast the Swedish krona as a safe-haven asset.

He also highlights there are worries the Riksbank might have to intervene in the currency markets for the first time in around 15 years if the currency unexpectedly strengthens in the aftermath of the EU referendum, or during the second half of the year due to expectations that the central bank has run out of monetary firepower.

"If it wasn’t for inflation concerns and if investors were just looking at GDP performance, there could be an argument that the Swedish krona is undervalued," says Ahmad. "Having said that, inflation is a concern and the central bank of Sweden clearly desires prolonged weakness in the currency."

In the current situation, Hammer says all currencies will move violently, no matter the referendum outcome. 

"In fact, I think we will see the bulk of the currency moves within days and then the market will settle down as we try to interpret what happens next," he adds.

"In a Remain, GBP/USD will move to 1.50 to 1.55 and we would look to sell sterling up there. In a hard Leave – Leave is greater than Remain by at least 5% – GBP/USD will probably move below 1.30 rapidly."

There are also concerns that if the UK leaves the EU, this might mean other northern countries such as Sweden might reconsider their own membership.