Rate rises and risk appetite to boost the krona

A WESTERN central bank able to raise interest rates without sparking concerns of excess monetary tightening is still something of a rarity. But the Swedish Riksbank has been able to do just that. Earlier this month, it raised rates to 0.75 per cent and signalled that it intended to increase them to 1.75 per cent by the end of 2013 with one further rise this year.

The hike attracted further speculative flows into the Swedish krona, which has strengthened considerably over recent months. Against the euro, it has gained almost 10 per cent since the start of the year to 9.1935kr. Against the greenback it has appreciated 13 per cent over the past three months to trade at 7.1395kr.

Strategists have attributed the krona’s strength to the rebound in equity markets, a resurgence in risk appetite over the summer as concerns about the Eurozone sovereign debt crisis die down and a general improvement in the global economy.

This strength is expected to continue: “There is a continued search for G4 alternatives that are still fundamentally strong, so yield will ensure the Swedish krona finds support against the euro in the months ahead,” says RBS’s Ankita Dudani.

Saxo Bank’s FX consultant John Hardy says that as long as the mood remains optimistic and the market prices in a couple more rate hikes over the coming year, then euro-krona could continue to appreciate slowly. But an export-led economy like Sweden will feel the effects of a slowdown acutely so any risk aversion could see the euro strengthen.

Currencies Direct’s Mark O’Sullivan points out that a lot of good news is already priced in to the Swedish krona. “An important level is 9kr to the euro. Euro bears may be wary of pushing it even lower so if we get better-than-expected Eurozone data then the single currency may enjoy a short-term bounce.” But he says that these bounces should provide an ideal point at which to buy the krona.

Besides trading euro-krona, there are other ways in which traders can play the krona. In the short-term, export-orientated Sweden will benefit from the positive Chinese data showing a rebalancing of the economy. Therefore, BNP Paribas’ Ian Stannard recommends selling dollar-krona corrective rebounds towards 7.19kr with a stop placed at 7.24kr and a target of 6.80kr.

Krona-yen is an actively traded pair at the moment, says O’Sullivan. If you think the yen is currently overbought, then you could go long on the krona to benefit from both the carry and the expected reversal in the yen if global risk appetite continues to strengthen, he suggests.

With further rates pencilled in, the krona should continue to gain against the euro and the greenback. Use any periodic weakness in the Swedish currency to buy at cheaper levels.