Sweden – when doves cry

Pine trees look awfully similar, so perhaps we should be more forgiving when the Riksbank continually barks up the wrong one. Lowering the exchange rate while driving real interest rates deep into negative territory has substituted a gain in purchasing power from cheaper goods/commodity imports (with a strong/stable FX policy) to credit-fuelled demand. The end result in terms of growth is similar, just the Riksbank’s path has also created a debt bubble. To address this another volte-face is needed. First, the Riksbank needs to tolerate a stronger exchange rate. Then, the aim should be to back away from negative rates. Switzerland is the counterpoint to Sweden. Swiss growth remains weak and deflation has a foothold. In real effective exchange rate terms the Swiss franc is 15-20% overvalued. The Swedish krona in contrast is 15-20% undervalued. While we think the krona will outperform the euro, a long krona position against the Swiss franc looks even more compelling for the medium-term.

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