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Foreign Exchange

SEB disputes OECD claim that krona is overvalued

The Organisation for Economic Cooperation and Development (OECD) says the Swedish krona, based on purchasing power parity (PPP), is overvalued by more than anything seen in the past 40 years, but SEB, Sweden’s largest bank, counters the claim.

The Paris-based OECD says, based on relative prices of goods and services, the Swedish krona is overvalued by 25% against the dollar, the most since 1970.

However, FX strategists at SEB, the biggest player in the Swedish market with a share of 22%, according to Euromoney data, say the OECD findings are misleading.

“The OECD estimates are quite unrealistic,” says Carl Hammer, head of FX strategy at SEB. “There are many more parameters needed to be considered for a long-term fair value, and simple PPP calculations can be a very blunt and sometimes misleading tool.”

The Swedish bank’s models show that the krona might be trading at one of the lowest premiums of any G10 currency against the dollar. Indeed, it notes that Sweden has a strong trade surplus, indicating that, from this perspective, the currency is undervalued.

 EURSEK fair value (SEBEER)

 
 Source: SEB

EURSEK was trading around the SKr8.80 mark and USDSEK around SKr6.65 on Monday, but aggregation of analyst three-month forecasts shows the consensus estimate for the krona is to depreciate to SKr8.89 versus the euro and to SKr6.90 against the dollar.

SEB in contrast has said it believes the krona’s strength will be sustained during the next two quarters and see a further appreciation more likely than a decline.

The Swedish bank says their in-house fair-value models, based on a variety of annualised data on the Swedish economy, predict EURSEK should be trading between SKr8.00 and SKr8.50.

“On a trade-weighted basis, the SEK is roughly trading in line with what would be regarded as fair value, but a further 3% to 5% of trade-weighted appreciation is well within the band of our forecast intervals,” says Hammer.

However, even with the prospect of a further loosening of monetary policy after Riksbank’s recent cut of its main interest rate to 1.5%, the appeal of the krona might well benefit from global diversification flows, he says.

Hammer says while the relative lack of liquidity in the krona undermines its case for being seen as a place of safety amid market turmoil, Swedish assets, with rock-solid AAA ratings, are a safe haven.

“From the perspective of global portfolio flow diversification, when you have reserve managers looking at what to invest in, Sweden is an attractive destination and, taking into account the valuation of the krona compared with other currencies, the stokkie should also be rated relatively highly,” he says.

The Australian dollar has been widely cited to have benefited from such flows, but the performance of krona has lagged behind that of the Aussie.

“The case for the Australian dollar, based on fundamentals, is still super strong but our analysis suggests the Aussie is more overvalued than the Swedish krona,” says Hammer.

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