Sweden Cuts GDP Forecasts, Boosts Stimulus

The Swedish government cuts its growth forecasts for this year and increased its spending to boost the economy, ahead of the Sept parliament elections. The krona is gaining against the euro, but this is more a reflection on the euro's weakness than the krona's strength.

This year's official GDP forecasts was cut to 2.5% from the 3% forecast made in late Jan. On the other hand, the growth was pushed out into next year with the 2011 forecast lifted to 3.9% from 3.6%. Although this is the government and not the central bank, the risk is that expectations of an early Q3 rate hike by the Riksbank prove premature. The government announced a SEK4.9 bln (~$685 mln) increase in spending, bring the stimulus spending to 1.2% of GDP. The government projects a budget surplus of 0.4% in 2012.

While dollar-krona movements seem largely a function of the euro-dollar action, the euro-krona cross is interesting in its own right. Since late Feb the euro has been mostly confined to a SEK9.65 to SEK9.80 range. The upper end of the range was tested earlier in the week and it held. The rule of alternation says the euro should now test the lower end of the range. Over time, we look for the euro to break the range to the downside and move toward SEK9.50.

We patiently watching sterling recover from its earlier slide against the krona for a better selling opportunity. Sterling is trading near SEK11.05 and the risk may extend toward SEK11.20 before a new and lower risk selling opportunity presents itself.