Scandi Update

The Norwegian krone and Swedish krona are the strongest major currencies today, appreciating about 0.85% and 0.6% respectively. While the fundamental justification of the more modest gains in the other major foreign currencies may be more elusive, in the Scandi's case, fundamental developments are supportive.

Sweden reported stronger business and manufacturing confidence numbers earlier this week, but the Feb retail sales report was a more significant catalyst. Retail sales rose 1.2% in Feb. The consensus was for a 0.1% rise. The Riksbank's Ekholm suggested today the economy appears to have bottomed after a 1.1% contraction in Q4. This week's data seems to further rule out a rate cut in April, which many had previously expected.

If monetary policy may be less accommodative, fiscal policy appears to be a bit looser. The budget authority today revised this year's forecast to a deficit of SEK13 bln from a surplus of SEK1 bln. Similarly, next year is now projected to have a budget deficit of SEK11 bln rather than a surplus of SEK14 bln. As a percent of GDP, this year's deficit is a minor 0.7%, the envy of most of the OECD.

On Monday Sweden's PMI will be reported and the economic recovery story is likely to be supported. The consensus calls for an increase to 52 from 50.3. If this does materialize, it will be the strongest reading since last June.

The euro has turned lower from the SEK8.96 area tested several times this month. If that marks the upper end of the range, the lower end comes in around SEK8.75-SEK8.80. The krona's out performance may also depend on the continued lower level of anxiety in the euro zone (which we are not convinced will be sustained) and to a less extent perhaps evidence of a soft landing in China.

There are four new developments from Norway today. Individually and collectively, they are positive for the NOK. First, the March PMI jumped to 59.7 from a revised 56.7 reading in Feb (initially 56.9). The market had looked for something closer to 55.

Second, Feb retail sales surged 1.1%. The market consensus called for a 0.2% decline.

Third, the central bank indicated that it would sell NOK350 per day in April, unchanged from March. The market had expected an increase in the NOK sales.

Fourth, and admittedly less meaningful for short-term currency movement, Norway's sovereign wealth fund reported that it had cut European bond exposure to 40% from 60% and European equity exposure to 38% from 47%. It boosted emerging market equities to 12% from 9%. It also increased Asia-Pacific bond exposure to 11% from 5%.

The Norwegian krone is among the worst performing major currencies this month following the unexpected rate cut earlier this month. However,it looks poised to recover in the coming weeks. The euro is currently near NOK7.60 and the risk extends toward NOK7.65, but there is potential back to NOK7.48-NOK7.50 over the next couple of weeks.