Hawks, hares and tortoises in Scandinavia

Kathleen Brooks
SCANDINAVIAN economies managed a soft landing during the global financial crisis. Unemployment and GDP held up strongly in Norway, and Sweden’s economy is starting to accelerate. With the Swedish central bank expected to strike a more hawkish tone when it meets later this week, now is a good time to pit the two currencies against each other.

For most of last year Sweden lagged behind its Nordic neighbour. The Norwegian krone outperformed the Swedish krona by 6 per cent in the past six months. Most of this was due to a rising interest rate differential. After exiting recession in the second quarter of 2009, the Norwegian central bank (Norges Bank) hiked interest rates twice to 1.75 per cent, in a bid to stop the economy from overheating. In contrast, Sweden’s central bank left interest rates at a record low of 0.25 per cent.

But this could be a case of the tortoise and the hare and Sweden’s krona could be about to shine.
At the end of January the Swedish finance ministry raised its growth forecast for 2010 for the second time in two months, this time predicting GDP will grow 3 per cent in 2010, up 1 per cent on its previous forecast. There was also an upward revision to inflation expectations, after the consumer price index expanded by 0.9 per cent in December.

Upgrades to the growth and price outlook have increased the odds that the Riksbank, Sweden’s central bank, will raise interest rates earlier than the markets expect. If this happens it would put pressure on the krona to appreciate. At its last meeting back in December, the Riksbank suggested that rates would not rise until the autumn. But the economy seems to be picking up speed; for example, the manufacturing index is rising at the fastest pace of any developed economy. Now analysts, such as Ian Stannard, at BNP Paribas, expect the Bank to adopt a more hawkish tone when it meets this week and to signal that it could raise rates before the autumn.

In contrast, Norway’s economy could lose some of its spark after the Norges Bank hiked interest rates by 50 basis points in the past five months. There was a significant drop in manufacturing output in 2009 and inflation looks likely to have stabilised at 2 per cent, after a fall in food and clothing prices in December. A narrowing of the interest rate differential between Norway and Sweden would boost the krona.

There are also technical factors to take into account, and so far these are pointing in the krona’s favour. It tends to move in line with the Swedish equity market and Norway’s krone with the oil price. The OMX equity index, which includes Sweden’s largest companies, has outperformed the oil price; falling 4 per cent in the past month, relative to a 10 per cent fall for crude oil. If this continues, it would be another reason why the krona could turn the tables on its Nordic rival.

The Riksbank’s meeting later this week holds the key to this trade, but the economic and technical signals point to a long awaited win for the tortoise.