Sweden Update

The Swedish krona has generally trended higher against the euro since the global financial crisis bottomed toward the end of Q1 2009. The euro recorded its multi-year lows against the krona in late Sept near SEK9.09.

A less aggressive trajectory of rate hikes signaled by the central bank and some disappointing data had encouraged some profit-taking on long krona positions. In addition, the end of emergency lending program, also in late September was a net drain of SEK300 bln(~$46 bln). This was reportedly disruptive to the domestic market where it was popular for banks to borrow cheaply from the Riksbank and buy covered bonds (the mortgage market in Sweden is twice the size of the government bond market).

This served to drive up long-term rates in Sweden as positions are adjusted the less liquid environment. Indeed over the past month the 10-year government bond yield in Sweden has risen 24 bp, in line with Italy's 28 bp increase.

The euro probed the SEK9.40 level in late Oct, and today's high just shy of SEK9.36 looks like a failed re-test. Tomorrow Sweden reports industrial output and orders data and the Sept reading should confirm that the 4% slide in Aug was a bit of a fluke and in some ways a pay back from the 3% rise in July.

Sweden's fundamentals look more solid than in most of the other G10 countries. Barring a negative surprise from the data, or an exceptionally powerful shift away from risk, look for the krona to continue to recover. Look for a move toward SEK9.20 in the coming days, with potential back to the lows before year-end or early next year.