LONDON, Nov 4 (Reuters) - The Swedish crown’s stubborn rise since the Riksbank announced another round of bond buying shows the Sweden is slowly losing a battle to weaken its currency, outgunned by the ECB’s huge monetary easing programme.
Several Swedish central bankers warned this week that the Riksbank is ready to take interest rates deeper into negative territory and perhaps even launch a rare round of currency intervention to drive the crown lower.
But investors have shrugged off the threats, driving the crown up 1 percent against the euro in the past week.
Better growth prospects have helped the currency, but analysts also say that Sweden’s efforts to engineer a weaker crown simply cannot counteract the European Central Bank, which is likely to expand its ultra-loose monetary policy in December in a bid to boost inflation.
In a bid to pre-empt the ECB’s expected move, the Riksbank said last week it would expand its bond-buying by 65 billion Swedish crowns to a total of 200 billion crowns (1.4 billion euros). This is just a fraction of the ECB’s scheme.
The asset purchase programme covers 34 percent of the outstanding stock of Swedish government bonds, compared to just 14 percent for the ECB. Analysts said that while this ratio is large in the Swedish context, the size of balance sheet expansion is tiny to have a lasting impact on the exchange rate.
Balance sheet expansion through asset purchases, or quantitative easing, usually weakens a currency as it increases its supply, but Sweden’s efforts just cannot match that of its biggest trading partner, the euro zone.
Expectations that the ECB will expand is 1-trillion euro bond buying programme and of a potential cut in the deposit rate have driven the euro lower against the crown and a host of other currencies like the dollar, the yen , and the Swiss franc.
“It is not very surprising to see such a reaction in the crown,” said Richard Falkenhall, currency strategist at SEB, a leading Nordic bank. “Right now, the Swedish crown is going in the opposite direction and investors know that there isn’t much the Riksbank can do.”
The Riksbank has cut rates three times this year, but the impact on the crown has been fleeting. The last cut, on July 2, took the key interest rate to a record low -0.35 percent and the crown fell to a 7-month low of 9.68 crowns per euro in late August.
Since then, the crown has recovered and was trading at 9.34.
“We have been noticing for several months that extra monetary accommodation is having less of an impact on weakening the crown,” Morgan Stanley strategists said in a note.
They said Sweden’s current account surplus was helping the currency, as was the fact that the Swedish economy was growing faster than the rest of Europe.
Sweden’s government expects the economy to expand 2.8 percent this year. Inflation, too, is picking up, with core inflation edging towards the central bank’s target of 2 percent.
Analysts say the Riksbank’s fight to keep the crown weaker is coming at a cost, given the risks of a housing bubble and a highly-leveraged household sector, but for an export-dependant economy there are few options.
One of them is intervening in the currency market. The Riksbank rarely intervenes and is usually considered as the last resort. The last time they intervened was in 2001 to halt the currency from weakening and was considered a failure.
“In our view, Riksbank will continue to fight against crown’s strength,” said Ulrich Leuchtmann, strategist at Commerzbank. “The risk that Sweden’s central bankers will at some point capitulate, like their colleagues in Switzerland did in January, nevertheless is marginally higher.”
1 euro = 140.9604 crowns Reporting by Anirban Nag; Editing by Raissa Kasolowsky