Stockholm: The Riksbank sold US$390mil in the first week of hedging its currency reserves, which has helped the Swedish krona recover some ground after a long period of weakness.
In a release published last Friday, the central bank also said it sold no euros in the week starting Sept 25.
The transactions are part of a plan to hedge about a quarter of the reserves, which have gained value in krona terms as the Swedish currency has weakened.
While the Riksbank says the move is purely intended to avoid potential losses, it adds demand for the krona, which has edged up from the deepest lows since the transactions started.
The krona initially strengthened after details of the purchases were published, reaching a two-week high of 11.5161 versus the euro, before giving up some of the gains.
The first week’s figures indicate that the Riksbank started its selling less aggressively than some in the market had expected, according to Francesco Pesole, FX strategist at ING Bank NV in London.
“The krona strength during the first week of hedging suggested the Riksbank had bought at a faster pace than that, but since they had not, this is a positive factor for the krona,” Pesole said. “There is quite a lot more firepower left.”
Not everyone is buying the central bank’s argument that the hedging is only meant to serve as sound risk management.
Last week, Ulrich Leuchtmann, head of currency strategy at German lender Commerzbank, called the move “completely inappropriate” and said it represents market intervention in disguise.
Others say the Riksbank’s announcement could be seen as a creative way to provide some support for the krona.
Kristin Magnusson Bernard, the chief executive officer of AP1 – one of Sweden’s biggest pension funds – has said the move shows officials “would like to see the krona strengthened and that they are ready to put money behind that”.
SEB AB strategists Amanda Sundstrom and Karl Steiner, meanwhile, said the pace outlined last Friday should be neutral to the krona.
In a note to clients, they also noted that the lack of euro sales can be explained by the fact that the Riksbank will use Sweden’s payments to the European Union for hedging the common currency, which means that operations in that part of the programme will be unevenly distributed.
In all, the Riksbank has said it will sell US$8bil and ¤2bil over the next four to six months.
Maintaining the pace outlined in last Friday’s release indicates that the US dollar part of the programme would be done in about five months.
The central bank may also be hoping that the krona will get added support from institutional investors opting to follow the central bank’s lead if they share the conviction that the krona is undervalued.
The decline of the krona, which remains 12% weaker against the euro than at the beginning of 2022, has complicated the Riksbank’s efforts to curb price increases, as it makes imported goods more costly.
Earlier last Friday, data from Statistics Sweden showed that the inflation rate slowed less than expected in September, increasing the likelihood that the Riksbank will raise its benchmark rate by a quarter of a percentage point, to 4.25%, in November. — Bloomberg
