Sweden

Since mid-May the Swedish krona has been the strongest of the major currencies, appreciating roughly 4.5% against the dollar and nearly 9%  against the euro.

Sweden's interest rates are attractive, especially on a risk-adjusted basis. At 90 bp, the two-year note yield is considerably higher than attainable in the non-periphery of Europe and without taking on extra risk. In fact, all three main agencies recognize Sweden as a triple-A credit.

The market seems to concur. The 5-year credit default swap costs less than 45 bp. In dollar terms, only Norway costs less to insure. Moreover, the recent has been spectacular, suggesting ideas of a rate cut next month are a stretch. Last week  saw a string of good economic news.  The government reported Q2 GDP at 1.4% quarter-over-quarter (5.7% annualized). Economists and the central bank itself had anticipated growth of only about 0.2%. Although it is subject to revisions, the sharp bounce in the July PMI to 50.6 from 48.4 in June suggests it may not be a complete fluke. Similarly, the service PMI jumped to 54.8 in July from 47.4 in June. 

Nevertheless, we are concerned that the good news has been largely discounted and further slowing of the world economy will weigh on Sweden, which exports about 50% of its GDP, with 72% going to the EU last year and another 8% to the US. The remaining 20% is to emerging markets, but as we know many of them, including China, India, Brazil are slowing. This warns that exports may slow after the 2.1% increase quarter-over-quarter in Q2 (1.1% in Q1). In addition, the domestic economy is soft. Fixed investment actually fell in Q2 and consumption rose a miserly 0.4%.  The Riksbank does not meet for a month (September 6), but the odds of a rate cut have fallen from 80% a couple of weeks ago to less than 30% now according to the derivative markets. 

The dollar slipped below the SEK6.70 support in thin turnover in Asia before rebounding in Europe.  However, new offers emerged near SEK6.76.  While the RSI has turned up, the MACD has not concurred.  Technically, the euro lows against the krona looks more convincing after recording a margin new (12-year) low before the weekend near SEK8.26.  Initial resistance is seen near SEK8.40, but if the upside correction in the euro continues, there is scope for the euro to rebound toward the late July high near SEK8.50.