There are many reasons for the krona’s strength, but above all it is the result of a relatively strong Swedish economy, low sovereign debt and sustainable public finances. In the past month, the central banks of countries such as Switzerland and Denmark that are also considered very stable, have threatened to or even reduced the interest rate on deposits to below zero, which has probably contributed to the attractiveness of the krona among foreign investors.
“Today, financial flows (foreign portfolio investment) have more impact on the exchange rate than new orders for Swedish exporters. Exporters have also changed their approach and now hedge foreign exchange earnings to a lesser degree than before,” Carl Hammer, Chief Foreign Exchange Strategist at SEB, says.
Hammer says the new approach has given companies more flexibility but also increased their vulnerability if the krona strengthens further. Swedish financial institutions (public pension funds) now have an historically high foreign currency exposure and corporations have a high balance on their foreign currency accounts.
“All these factors indicate that the krona is less vulnerable today and we still expect flows from other currencies into kronor,” Hammer says.
He adds that individual industries are obviously affected by a stronger krona, but as a country, Sweden is not as vulnerable as many other analysts appear to believe.
The Riksbank’s forecast is now in line with the position SEB has had for years: that the krona will appreciate to 8.40 against the euro. One euro currently buys around 8.70 kronor.
“We do not believe that a strong krona is a temporary phenomenon, rather it will consistently trade at a higher level against the euro and several other major currencies, such as the Japanese yen and British pound,” Hammer says.
More on Sweden's strong economic situation and the market's changing view of the krona from risky to defensive can be found by clicking the link below. Article originally published in January 2012.