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Nordic currencies rally, ECB the only risk

LONDON: The Swedish and Norwegian crowns are seen heading higher against the euro amid expectations of higher interest rates in the region, with how aggressively the European Central Bank will tighten policy the only wild card.

Hawkish comments from Norwegian and Swedish central bank governors boosted the currencies of both countries on Tuesday with the Swedish crown hitting record highs against the euro and the Norwegian crown getting close to similar peaks.

The Swedish and Norwegian crowns have both climbed more than two percent in the past two weeks, with the Norwegian crown getting an additional helping hand from rising oil prices.

Most analysts expect the Norwegian and Swedish central banks to stay ahead of the ECB in what looks to be a global credit tightening cycle and see more gains on the horizon for the currencies of both countries, barring surprises from the ECB.

"From the fundamentals side, the Scandinavian currencies look pretty good," said Klaus Kusber, currency analyst at Dresdner Kleinwort Benson in Frankfurt.

"But the risk is that (euro zone) inflation will begin to test the ECB's pain threshold and that it will do something on interest rates which starts a broad euro recovery."

The Swedish crown appreciated as far as 8.5130 per euro on Tuesday, while the Norwegian crown rallied to 8.0400 per euro, within a hair of a 8.0330 life low.

Expectations that Swedish and Norwegian rates, which are already above those in the euro zone, will rise in the coming months were fanned after comments on Tuesday by central bank chiefs from both countries.

Swedish central bank governor Urban Backstrom said the repo rate could not stay at its current low level for a full economic cycle while his Norwegian counterpart, Svein Gjedrem, said rates in his country were "at or near" the bottom of the cycle.

Swedish rates look likely to rise first, possibly even as soon as next week with the Riksbank due to hold its next regular policy meeting on February 3.

However, given they offer a smaller premium than Norway's over euro zone rates, the Swedish crown is not necessarily expected to outperform the Norwegian one too much.

Sweden's repo rate is at 3.25 percent, a quarter percentage point above the ECB's refinancing rate, while Norway's deposit rate is at 5.50 percent.

The Norwegian crown is also seen benefiting independently if oil prices OILOIL surpass the nine-year highs they have recently scaled. Brent futures hit a peak of $27.11 a barrel at the end of last week. Oil is a major export for Norway, and the crown typically benefits from higher oil prices.

"The (Norwegian) crown is seen as a petro-currency and has a direct correlation with oil prices," said David Brown, chief economist at Bear Stearns in London.

In the past three months, the Norwegian crown has risen from troughs below 1.04 Swedish crowns to around 1.06.

Higher oil prices hold their own risks for those betting on a further strengthening in the Nordic currencies.

Euro zone inflation is seen bolstered by such increases, increasing the chances that the ECB will tighten monetary policy more aggressively than is currently being discounted by the foreign exchanges.

This risk grew a little more evident on Tuesday after Germany, the euro zone's largest economy, reported an inflation rate of 1.7 percent for January, its highest in two years.

The ECB "is the joker in the pack and one that the market is least expecting," said Brown at Bear Stearns.-REuters