Stan Klebaner Chief Business  Development Officer at FinFx Trading Oy
Stan Klebaner Chief Business Development Officer at FinFx Trading Oy

Scandinavia

A backdrop of falling inflation

First Published: e-Forex Magazine 56 / Currency Clips / April, 2014

Weak GDP growth in Sweden during Q4 2013 coupled with a drop in Swedish rates resulted in downward pressure on the SEK. More importantly both the CPI and CPIF inflationary figures came in 0.3 % lower than Riksbank’s forecast, prompting the central bank to consider rate cuts if inflation should turn out weaker than is forecast. 

According to the EU commission Sweden is enjoying a recovery led by consumer spending and a rebound in investment.  As such, the country is poised to grow a faster rate than any of its Nordic neighbors within the next two years with an estimated GDP growth of 2.5 % in 2014 and 3.3 % in 2015 respectively.  The commission conveyed that “The Swedish economy now follows a more robust growth track and economic activity is expected to gradually accelerate and gross fixed capital formation is expected to rebound sharply in the coming years, adding a new engine to economic growth”. 

Source: Macrobond
Source: Macrobond

Weak GDP growth in Sweden during Q4 2013 coupled with a drop in Swedish rates resulted in downward pressure on the SEK. More importantly both the CPI and CPIF inflationary figures came in 0.3 % lower than Riksbank’s forecast, prompting the central bank to consider rate cuts if inflation should turn out weaker than is forecast. 

According to the EU commission Sweden is enjoying a recovery led by consumer spending and a rebound in investment.  As such, the country is poised to grow a faster rate than any of its Nordic neighbors within the next two years with an estimated GDP growth of 2.5 % in 2014 and 3.3 % in 2015 respectively.  The commission conveyed that “The Swedish economy now follows a more robust growth track and economic activity is expected to gradually accelerate and gross fixed capital formation is expected to rebound sharply in the coming years, adding a new engine to economic growth”. 

Nevertheless, we believe that the inflation rate in Sweden may fall below Riksbank’s estimates in the coming year. This scenario would suggest that both the inflation and wage expectations will fall further, enhancing the probability for Riksbank to cut interest rates again. We believe that there is a high likelihood that Riksbank will need to lower its inflation projection again in April. The below-mentioned comments from Riksbank’s Deputy Governor Martin Floden confirm our view  “it won’t take much new negative information primarily on inflation for him to vote for a rate cut” at the next meeting in April. 

Norway’s sovereign wealth fund (largest in the world) rose 692 billion kroner ($115 billion) last year as unprecedented central-bank stimulus propelled global stock markets to their biggest gains in four years. In addition, January 2014 brought Norway the highest ever recorded trade surplus of 48.8 BB NOK.  Although the surplus was mainly driven by high oil prices, it is important to note that mainland exports in January were up almost 10% last year and 5.5% on the average for Q4. Furthermore, the European commission estimates that Norway’s economy will expand 2.7 % this year, which is 0.2 % more than Sweden.   We expect these factors to weigh in favorably for the Norwegian currency when assessing the NOK/SEK relationship Q2 2014.