Policy makers in Sweden and Norway are struggling to pound down their currencies through verbal beatings as a search for yield replaces haven demand.
Central bankers and finance ministers in the Nordic nations are signaling that policy actions may be warranted to protect jobs as Norway’s import-weighted krone index surged to a record and Sweden’s krona touched a 15-month high against the dollar this month.
“Given the weak economic development, it would have been an advantage if the krona had weakened somewhat, that’s clearly the case,” Swedish Finance Minister Anders Borg said yesterday in Stockholm. His Norwegian counterpart, Sigbjoern Johnsen, said last week the strong krone is a “challenge” for businesses, adding fiscal policy can’t be allowed to fuel further appreciation. Borg also said Swedish monetary policy has hurt the economy by strengthening the currency.
The persistent strength of the two currencies suggests their stint as havens during the bleakest hours of Europe’s debt crisis is becoming a longer-term shift. Investors have remained loyal to the krona and krone as AAA rated Sweden and Norway keep their debt burdens in check and as their growing economies allow for higher interest rates than those set in other developed markets. Sweden's policy rate is a quarter point higher than the euro zone's while Norway's is twice as high. Two-year Swedish bonds yield about 80 basis points more than their German equivalents.
“If you think about it as a product, the Norwegian krone secured a very strong brand in the market,” Daragh Maher, a currency strategist at HSBC Holdings Plc., said in an interview from London. “That’s why you can continue to see appetite for buying Norway by reserve managers on an on-going basis even as the European situation is not as worrisome as before.”
Demand for the krone and krona has left the two currencies overpriced, according to a gauge of currencies among Organization for Economic Cooperation and Development members. Norway’s krone is 40 percent overvalued versus the dollar this year, topping the 12 major currencies tracked. Sweden’s krona is 27 percent overvalued.
Norway’s krone has gained 2.4 percent against the euro in the past year and is up 4.5 percent versus the dollar. It traded as high as 5.5864 yesterday per dollar. Sweden’s krona has appreciated 1 percent versus the euro and 3.2 percent against the dollar in the past 12 months. It traded as strong as 6.5041 per dollar yesterday.
Demand for Swedish kronor also pushed up the price of the country’s bonds last year, making them more expensive and squeezing the potential for returns. This year, Swedish debt longer than one year has lost 1.4 percent date. The best performing government debt so far in 2013 was issued by Greece, Italy and Ireland, according to Bloomberg/EFFAS indexes.
Sweden’s central bank has been propping up the krona by keeping “monetary policy tighter than in other countries,” Borg said yesterday. That’s making life harder for exporters, he said.
The Riksbank is also fielding criticism from inside its six-member board. Deputy Governor Lars E.O. Svensson said on Jan. 16 that Sweden’s economy “would manage better in this very difficult, weak economy with a lower rate and a weaker krona.”
His boss, Governor Stefan Ingves, has argued against lower rates to avoid fanning private debt growth. Ingves, who is also the chairman of the Basel Committee on Banking Supervision, signaled last month’s quarter point cut to 1 percent probably will be the bank’s last this cycle. The bank should deploy policy to ensure debt burdens, which reached a record 173 percent of disposable incomes last year, don’t swell further, he said.
Sweden’s gross domestic product will expand 1.9 percent this year and 2.5 percent in 2014, the European Commission said in November. The euro area will grow just 0.1 percent this year after shrinking 0.4 percent in 2012, the commission estimates.
Norway’s mainland economy, which excludes income from oil, gas and shipping, will expand 3 percent this year and 2.75 percent in 2014, the central bank estimates. Governor Oeystein Olsen left the bank’s main rate at 1.5 percent for a fifth meeting last month.
His deputy, Jan F. Qvigstad, said last week that if the krone remains “as strong as it is now” the gains will have an “obvious effect” on policy setting. Yet even that may not be enough to deter currency investors, according to HSBC’s Maher.
“I don’t think that the Norway bull story needs a Norges Bank hike,” he said. “It would be an added bonus if we end up with a more hawkish than expected profile but I don’t think it is an important element for now.”
It costs less to insure against a default of Swedish and Norwegian government debt for five years using credit default swaps than it does to guard against non-payment on U.S. government debt.
Sweden’s default swaps traded at about 18 basis points yesterday, compared with 43 on similar U.S. contracts and 40 for five-year default swaps on German debt. Norway, which has no net debt, is the world’s safest credit at about 17 basis points, its default swaps show.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Norway, western Europe’s largest petroleum exporter, boasts a $700 billion sovereign wealth fund built from its oil reserves. Sweden has so far skirted the euro area’s recession as Prime Minister Fredrik Reinfeldt promises stimulus to sustain growth. Sweden’s benchmark index of the country’s 30 most-traded stocks rose 12 percent last year, beating a 7.3 percent increase in the Dow Jones Industrial Average.
“There is a perception that the Swedish krona is more of an equity market-sensitive currency and on that basis maybe you would say if the world is normalizing and we are getting more upbeat on the euro zone, then Sweden is in a better position to capitalize than Norway,” Maher said. “That may prove to be the case, but I think it is too early.”
The krona posted a record fourth consecutive annual gain against the euro last year, strengthening 4 percent against the single currency. Norway’s krone appreciated 5.5 percent against the euro in 2012.
The Confederation of Norwegian Enterprise, Norway’s biggest employer group, said last week that the “main” cause of the country’s cost disadvantage stems from krone gains. Norwegian exports fell an annual 9.7 percent in December, according to Statistics Norway.
The Swedish Trade Council and exporters said in August, when the krona touched its highest versus the euro since 2000, that the currency’s strength risks triggering job cuts. Swedish unemployment jumped to a two-year high of 8.1 percent in November as firms such as Ericsson AB and Volvo AB cut jobs.
The fallout is firming political resolve to act as Borg warns that the krona’s strength “is a factor that contributes” to Sweden’s weak growth prospects.
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