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The Scandies Could Be On To A Winner. By Nicholas Hastings.
LONDON (Dow Jones)--Looks like win-win for the Scandies!
If Sweden and Norway have got it right and the global economy stops deteriorating soon, then both their currencies should get a boost as yield differentials widen in
their favor.
But, even if the Scandinavian central banks have got it wrong and global growth continues to slide, their currencies should still find support from strong growth.
The focus on Scandinavia intensified last week as Sweden announced a surprise 0.25 basis point hike in its interest rates to 4.25% and Norges Bank Governor Svein
Gjedrem appeared to turn more hawkish.
These developments coincided with a rise in global risk appetite as new economic data from both the U.S. and Japan helped to raise hopes that an end to the recent
economic slowdown is in sight.
The Riksbank made it clear that its rate move - which certainly wasn't anticipated by any market watchers - was made largely in response to a rapid rise in inflation
and fears that price pressures will remain high over the coming year.
Many found the decision fairly puzzling given the recent slowdown in Swedish growth, which the central bank itself only expects to amount to 2.0% this year.
"It is not clear why Swedish growth should remain at 2.0% or above this time round," said Dominic Bryant, a European economist with BNP Paribas in London, pointing to
both a recent fall in confidence indicators as well as the tightening in rates.
On top of this, Bryant noted, Swedish growth "moves very much in line with the U.S. and the euro zone cycle" and hence is obviously vulnerable to a further
deterioration.
Norges Bank's Gjedrem created another stir in his annual speech to the bank's supervisory council. Although he did acknowledge the increased risks to global growth, he
made it clear that he was far more concerned about the persistent upside risks to inflation posed by higher wages as the Norwegian economy remained fairly robust.
"Overall, the bullish domestic situation was more dominant in his assessment of the policy outlook and at least one further rate hike from the current 5.25% level now
seems all but certain," said Daragh Maher, a senior currency strategist with Calyon Credit Agricole in London.
"Rate differentials are likely to widen, keeping the Norwegian krone supported," said the currency strategist team at BNP Paribas in London.
They believe that "Norway's low non-oil trade exposure will shield the economy from the global demand slowdown."
Of course, this yield support for the Scandies is only likely to continue as long as global growth prospects continue to improve and investor risk continues to recover
in favor of higher-yielding currencies.
However, continued relatively strong growth outlooks in both the Swedish and Norwegian economies could also provide support.
Recent shifts in currency market sentiment have suggested that a further rise in risk aversion could mean that investors become more interested in chasing growth rather
than yields, ensuring that both currencies remain in favor.
Nevertheless, the two currencies could struggle to move much higher just now.
According to Roberto Mialich, a currency strategist with UniCredit Markets and Banking In Milan, technical factors could get in the way.
"Charts indicate that it will be hard to see both euro/Swedish krona and euro/Norwegian krone much below 9.30 and 7.90, Mialich said, suggesting that last week's
decline in the euro could provide a good buying opportunity.
Early Monday in Europe, a resumption of interest in carry trades is helping to push high yielders higher at the expense of low yielders, as the market continues to
shrug off the latest negative data on the U.S. economy, assuming that the fiscal and monetary easing packages in place will eventually prevent the country from falling
into recession.
By 0800 GMT, the dollar was up at Y107.99 from Y107.66 late on Friday in New York, according to EBS. The euro is also up ay Y158.49 from Y157.99 as the single currency
slipped a little to $1.4672 from $1.4678.
The euro is also down at SEK9.2953 from SEK9.3187 early Friday afternoon in Europe and at NOK7.8941 from NOK7.9293.
If Sweden and Norway have got it right and the global economy stops deteriorating soon, then both their currencies should get a boost as yield differentials widen in
their favor.
But, even if the Scandinavian central banks have got it wrong and global growth continues to slide, their currencies should still find support from strong growth.
The focus on Scandinavia intensified last week as Sweden announced a surprise 0.25 basis point hike in its interest rates to 4.25% and Norges Bank Governor Svein
Gjedrem appeared to turn more hawkish.
These developments coincided with a rise in global risk appetite as new economic data from both the U.S. and Japan helped to raise hopes that an end to the recent
economic slowdown is in sight.
The Riksbank made it clear that its rate move - which certainly wasn't anticipated by any market watchers - was made largely in response to a rapid rise in inflation
and fears that price pressures will remain high over the coming year.
Many found the decision fairly puzzling given the recent slowdown in Swedish growth, which the central bank itself only expects to amount to 2.0% this year.
"It is not clear why Swedish growth should remain at 2.0% or above this time round," said Dominic Bryant, a European economist with BNP Paribas in London, pointing to
both a recent fall in confidence indicators as well as the tightening in rates.
On top of this, Bryant noted, Swedish growth "moves very much in line with the U.S. and the euro zone cycle" and hence is obviously vulnerable to a further
deterioration.
Norges Bank's Gjedrem created another stir in his annual speech to the bank's supervisory council. Although he did acknowledge the increased risks to global growth, he
made it clear that he was far more concerned about the persistent upside risks to inflation posed by higher wages as the Norwegian economy remained fairly robust.
"Overall, the bullish domestic situation was more dominant in his assessment of the policy outlook and at least one further rate hike from the current 5.25% level now
seems all but certain," said Daragh Maher, a senior currency strategist with Calyon Credit Agricole in London.
"Rate differentials are likely to widen, keeping the Norwegian krone supported," said the currency strategist team at BNP Paribas in London.
They believe that "Norway's low non-oil trade exposure will shield the economy from the global demand slowdown."
Of course, this yield support for the Scandies is only likely to continue as long as global growth prospects continue to improve and investor risk continues to recover
in favor of higher-yielding currencies.
However, continued relatively strong growth outlooks in both the Swedish and Norwegian economies could also provide support.
Recent shifts in currency market sentiment have suggested that a further rise in risk aversion could mean that investors become more interested in chasing growth rather
than yields, ensuring that both currencies remain in favor.
Nevertheless, the two currencies could struggle to move much higher just now.
According to Roberto Mialich, a currency strategist with UniCredit Markets and Banking In Milan, technical factors could get in the way.
"Charts indicate that it will be hard to see both euro/Swedish krona and euro/Norwegian krone much below 9.30 and 7.90, Mialich said, suggesting that last week's
decline in the euro could provide a good buying opportunity.
Early Monday in Europe, a resumption of interest in carry trades is helping to push high yielders higher at the expense of low yielders, as the market continues to
shrug off the latest negative data on the U.S. economy, assuming that the fiscal and monetary easing packages in place will eventually prevent the country from falling
into recession.
By 0800 GMT, the dollar was up at Y107.99 from Y107.66 late on Friday in New York, according to EBS. The euro is also up ay Y158.49 from Y157.99 as the single currency
slipped a little to $1.4672 from $1.4678.
The euro is also down at SEK9.2953 from SEK9.3187 early Friday afternoon in Europe and at NOK7.8941 from NOK7.9293.
18 February | 
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