Swedish Krona Eyes Losses after Election Result Leaves Markets Focused on Negative Fundamentals

-SEK slips after election yields hung parliament and analyst unease.

-Vote means period of horse trading as analysts look to fundamentals.

-Fundamentals are weak, more losses ahead for beleaguered currency.

© Pound Sterling Live

The Swedish Krona ceded ground to the Pound and Euro Monday after a general election left the Nordic country with a hung parliament, prompting some analysts to forecast further losses for the currency given its negative fundamentals and an unsupportive international environment.

Sweden's general election yielded a hung parliament according to national broadcaster SVT Nyheter, with neither centre-right or centre-left coalitions securing enough support to wield a majority, although an insurgent fringe party grabbed a lesser share of the vote than many pundits had previously feared. 

"The Swedish election result could hardly have been closer. On current projections, two major political blocks are separated by a single parliamentary seat," says Jonas Goltermann, a developed markets economist at ING Group, in a note to clients. "The rise of the far-right Sweden Democrats means that neither the current centre-left government nor the centre-right ‘Alliance’ is anywhere near a majority in parliament."

The Social Democrats, who were the larger party of the previous coalition, saw their vote share decline to by 2.8% to a total of 28.4% at the weekend. The Moderates, who were the largest party in the centre-right opposition, saw their share of the ballot box decline by 3.5% to 19.8%. 

Meanwhile, the insurgent Sweden Democrats saw their share of the vote rise by 4.7% to a total of 17.6%. Other smaller but fringe parties, mostly those on the left, also saw their support increase although none scored more than a 10% share of the vote. 

Immigration and policies relating to the 160,000 or more asylum seekers who have entered the country since 2015 were hot button issues in the election, which has now given way to what analysts say will be a protracted period of negotiations and horse trading over the likely shape of a coalition government. 

"Prime Minister Stefan Lofven has announced he will stay in office and seek renewed support for a government led by the Social Democrats. The opposition parties have called on him to resign, and want to form a centre-right government. So, ahead of what looks likely to be long and tough negotiations, this will amount to little more than political theatre," says Goltermann.

Ahead of the all the horse trading, analysts are eyeing the already-beleaguered Swedish Krona and an increasingly negative set of fundamentals that underwrite the currency. Sweden's Krona has fallen sharply this year, with the USD/SEK rate up by 10% and the Pound-to-Krona rate rising 6.8%. The EUR/SEK rate has risen 6.9% in 2018.

"We continue to see the underlying story as SEKnegative: the domestic economy is slowing, the Riksbank remains among the most dovish central banks, and Sweden is highly exposed to the impact on global trade of the Trump administration’s aggressive tariff policies," Goltermann writes.

Like many others, Sweden's currency has fallen victim to an unfavourable evolution of the global interest rate landscape in 2018. The Swedish central bank, the Riksbank, has held its interest below zero ever since the end of 2014.

Meanwhile the US Federal Reserve has raised interest rates seven times since the end of 2015 and other central banks are now following suite. This has created an incentive for traders to sell the Krona and buy US Dollars, or a range of other currencies that offer higher, or simply just improving, returns. 

The Riksbank cut its interest rate from -0.35% to -0.50% in February 2016, in order to encourage an uptick in economic activity that would help the bank meet its objective of keeping inflation close to 2%. Swedish inflation sat close to zero from the beginning of 2012 until the end of 2015, although it has since risen and was recorded at 2.2% in June 2018. 

In theory, this improvement in the inflation outlook means the Riksbank could justify raising its interest rate at any point. Indeed, it has hinted in recent months that it will look to raise rates around the end of the year. But inflation and related expectations could still be adversely impacted by a slowing economy.

They could also be negative effected by any sharp increase in Swedish exchange rates. And it is for this latter reason that the Riksbank is often seen making changes to monetary policy almost in lockstep with the European Central Bank, given the Eurozone is Sweden's most important trade partner and the EUR/SEK rate the most significant for domestic inflation. 

Some analysts say the election outcome, and current inflation backdrop in Sweden, mean the Krona should outperform other currencies throughout the current week. 

"The forward curve is much flatter than Riksbank’s updated forward guidance and markets attach little credibility to the central bank’s guidance that rates will rise in either December or February. As such, we see asymmetric risk into key data (CPI on Friday) and central bank speakers (af Jochnick and Ingves this week) and maintain a bias for SEK outperformance," says Adam Cole, chief currency strategist at RBC Capital Markets.

Cole and the RBC team advocated on Monday that clients of the bank sell the EUR/SEK rate short in anticipation of a near-2% decline toward the 10.25 level, entering the trade at 10.45.

The RBC trade is a short-term idea. But when it comes to the medium-term, Goltermann's colleagues on the currency desk at ING have an altogether more bearish view of the Swedish Krona.

They forecast the EUR/SEK rate will rise sharply before the end of the year, from 10.48 Monday to 11.0 by the end of December. This would take the exchange rate's 2018 loss above 11%.

They also forecast a similar path for the Pound-to-Krona and USD/SEK rates too, with Sterling seen rising from 11.77 to 12.50 by year-end while the USD/SEK rate is expected to increase from 9.03 to 9.40. 

The Pound-to-Krona rate was quoted 0.66% higher at 11.7577 Monday while the EUR/SEK rate was up 0.26% at 10.4810. The USD/SEK rate was down 0.13% at 9.0319.

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