August 29, 2018 / 2:28 PM / 3 months ago

Election, rate expectations push Swedish crown to nine-year low

LONDON (Reuters) - The Swedish crown slid to a nine-year low against the euro on Wednesday, with its losses accelerating before next week’s election, amid growing investor conviction that interest rates may not rise until well into 2019.

FILE PHOTO: New Swedish Krona banknotes are seen in this picture taken September 14, 2015. REUTERS/Fredrik Sandberg/TT News Agency/File Photo

So far this year, the crown has weakened more than any other developed-world currency, falling 12 percent against the dollar and nine percent versus the euro. The main reason was expectation the Swedish central bank will be among the last to end stimulus policies dating from the 2008 financial crisis.

Major FX YTD performance - reut.rs/2MZiSzP

Sweden’s benchmark repo rate has been unchanged at minus 0.50 percent since February 2016, the second lowest in the world after Switzerland. The central bank signalled recently that policy would tighten by the end of this year, but expectations are growing that rate hikes may be put off until next year.

Inflation in July was 2.2 percent, broadly in line with analysts’ expectations. Slow underlying price pressures mean the bank is under no pressure to raise rates.

And political risk is muddying the waters — no party or bloc is likely to win a majority in the Sept. 9 elections. Concerns over immigration and crime bolstered the nationalist Sweden Democrats, with polls suggesting it might rival the mainstream Social Democrats and Moderates after the vote.

“Low underlying inflation is putting question marks on Riksbank rate hikes and political risks ahead of the election are lowering the crown,” said Lina Fransson, a strategist at SEB.

She said the central bank, which meets next week, could voice alarm at the crown’s latest leg of weakness but added:

“With the general election coming up on the following weekend, there should also be limited interest to buy crown after the meeting even with a hawkish twist.”

Swedish opinion polls: tmsnrt.rs/2LmSZFD

The crown traded at 10.69 crowns per euro, just off the 10.72 crowns hit on Tuesday which was the lowest since July 2009. Against the dollar, the crown was at 9.17 crowns per dollar, just below a December 2016 low hit earlier this month.

Sweden has seen years of rapid growth and low interest rates, but the effects of government spending to handle a wave of immigration and ultra-loose monetary policy have started to crimp demand for the Scandinavian country’s assets.

Sweden will probably be surpassed by Norway as the fastest-growing Scandinavian economy in 2019, according to a Reuters poll this month.

The crown’s slide has appeared to also infect the Norwegian crown, which fell towards 9.7790 against the euro, its weakest since February.

“That the Norwegian crown is weakening on the back of a weaker Swedish crown is nothing new,” said Nordea analyst Andreas Steno Larsen.

But he said he expected the correlation between the currencies to diminish, given the Norges Bank is expected to raise rates in September.

At a policy review earlier this month, Norway’s central bank kept its main rate unchanged at a record low 0.50 percent on Thursday, as expected, and reiterated plans for a September increase, in line with its earlier forecast.

Reporting by Tom Finn; Editing by Saikat Chatterjee

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