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Swedish and Norwegian currencies have become the favorite way traders can wager on a revival of the European economy, surpassing other key peers since the beginning of the year when local lawmakers promise to spend.
Swedish Krona has risen more than 10% against the US dollar this year, pursuing its biggest quarterly gain since 2010, while Norwegian Krone has risen by more than 8%, making its biggest jump in more than two years.
This will be the best performance of the G10 group of euro and pound developed market currencies as investors bet on higher roads for interest rates in Scandinavian countries and tailwinds from the push for key spending promised by Germany and other major powers.
“The Scandi currency is simply the euro of steroids,” says Kamarthaluma, Forex strategist at Bank of America.
Germany’s huge spending plans that fostered hope for Europe’s growth will have a particularly positive impact on Sweden, which has a large defence sector.
Last year, Swedish arms exports remained unrivaled by France, the world’s second largest major arms producer, after the US, according to data from the Stockholm Institute of International Peace and calculations by Spare Bank 1 Market. Stockholm also announced that it would increase its own military spending to 3.5% of GDP by 2030.
Analysts say Norwegian krone is being helped by the defense sector, but the steel and aluminum industries come from pushing European infrastructure.
Currency profits marked a comeback from last year, with the exception of a dramatic downturn seen only early in the coronavirus pandemic, with the Norwegian krone marking a record low against the dollar and euro.
“The movement over the past few weeks has been really big,” said Dane Cekov, FX strategist at SpareBank 1 market, adding a steady fiscal outlook, “As the US is messy, while the US president’s Donald Trump administration intended international relations.
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Bofa expects Sweden and Norway’s economies to grow by 1.8% and 1.5% next year, respectively, compared to 1.1% in the eurozone.
The expected boost to Scandinavian economies has led to shares in military companies such as Saab rising by more than 70% since the start of the year, while Norway’s Kongsberg Gruppen rose by more than a fifth.
Higher inflation than expected for both economies in recent weeks is also a “wake-up call” for central banks to keep interest rates higher, according to MagneØstnor, FX strategist at DNB Markets.
The market expects the European Central Bank to make at least two-half cuts by the end of the year. In contrast, with Norwegian Norges Bank’s one second chance, only one cut is fully priced, but Sweden’s Riksbank is not expected to cut prices at all this year. Norwegian central bank on Thursday put on interest rates at a 17-year high of 4.5%.
As investors’ concerns rise and Trump’s aggressive trade tariff plans could harm the US economy, lightning rally in currency was also aided by a widespread weakening of the dollar.
Central bank officials in Swedish and Norwegian have personally said they are somewhat unsure of the reason for the particularly strong recent performance of the currency. Norwegian krone has historically been strengthened by oil prices, but global benchmark Brent crude has declined slightly since the beginning of the year.
Brad Bechtel, Jeffries’ global head of Forex, said outperformance was a reflection that the currency was “undervalued” before the recent spending catalyst.
Additional Reports by Richard Milne and Ray Douglas
