Sweden Goes to the Polls September 9

The Swedish krona is the weakest of the major currencies so far this year, having lost more than 10% against the US dollar and about 6.6% against the euro.  The main weight arguably was the trajectory of monetary policy.  The Riksbank meets tomorrow, but the repo rate is expected to remain at minus 50 bp and the deposit rate at minus 125 bp.  A rate hike does not look likely before Q1 19.  

Often, it appears that the krona trades like a risk asset.  Its correlation, for example, with the MSCI Emerging Markets Index has been among the strongest for the major currencies.  On a 60-day rolling basis, the percent change of the krona and the percent change in the MSCI EM Index had the strongest correlation at the end of August in two years.  

Sweden holds a national election this coming Sunday, September 9.  The last YouGov poll ahead of the election was published today.  It showed the anti-EU Democrats as the strongest party.  It wants to hold a referendum on its EU membership.  The poll also warned that the Greens, part of the governing coalition, may not meet the 4% threshold for parliamentary representation.   

The YouGov poll needs to be taken with the proverbial grain of salt.  The survey was conducted over the internet with no attempt to offer a random or representative sample.  It also contradicts other polls that put the Democrat support closer to 16.5% rather than the YouGov's 24.8% result.  

Even if the YouGov poll exaggerates the strength of the Democrats, they may still play an important role.  Neither the center-left (Social Democrats and Greens) nor the moderate bloc (three parties) is polling 50%.  At the same time, the major parties have ruled out being in a coalition with the Democrats.  Ironically, in Italy, which is the first EU country to elect a populist government (since Greece), the Five Star Movement had shunned coalition partners, but now it is governing with the (Northern) League.

Immigration, as elsewhere in Europe is an important issue. On a per capita basis, the immigration into Sweden has been as large as anywhere in Europe.  The Social Democrats and Greens tightened up the rules after a 163k surge in 2015  Law and order issues also appear particularly salient after last month's crime and car-burning spree in Gothenburg (and other towns in the west).  

The euro has had three distinct moves against the krona this year.  The euro rallied from around SEK9.75 in late January to almost SEK10.70 by early May, the highest since 2009.   It consolidated through July largely between SEK10.20 and SEK10.40. In August, the euro trended higher again and reached almost SEK10.73 at the end of the month.  

The euro has corrected lower in recent days, reaching almost SEK10.52 today.  It corresponds to the 20-day moving average, which the euro has not closed below in more than a month.   The 38.2% retracement of the last month's rally is near SEK10.54 while the 50% retracement is closer to SEK10.48.  Ahead of the election, the one-week volatility jumped to nearly 11% today.  The 30-day average was near 6% at the end of last month.  The three-month implied vol is around 7.5%, which is a two-year high.  It may take a few days after the election, but we would expect to see volatility ease.  

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