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Swedish krona and Swiss franc charter new ground with negative rates; Canadian dollar hit by oil

Deflation fears pushes Swedish krona to multi-year lows  

The Swedish krona has been one of the worst performing currencies in the developed world, declining over 12% during the past year. It has been falling against the euro since August 2012 and has depreciated rapidly against the dollar since March 2014, hitting a lot of 8.88 kronor per dollar, though since recovering slightly to around 8.3. Low inflation expectations has been the main driver of the krona’s weakness as Sweden’s central bank, the Riskbank, has been struggling to get inflation back to its target of 2%. Annual CPI dipped below 2% at the start of 2012 and has been hovering around 0%, mostly in negative territory, since the end of 2012. The Riksbank became the first central bank in the world in February this year to cut its repo rate to a negative rate. It cut again in March to -0.25% from -0.1% and was accompanied by a quantitative easing program of between 40-50 billion kronor. The measures initially had the desired effect of depreciating the krona against the euro, as it fell to around 9.68 kronor per euro. But the European Central Bank’s own massive QE program soon overshadowed the Riksbank’s attempts and the krona has risen back to around the 9.35 level, which may impact Swedish exporters whose largest trading partner is the Eurozone. For the year end, the inflation outlook is expected to improve, which should help the krona appreciate from recent lows.

 

Swiss franc spike after SNB lifts currency cap hurts economy

The Swiss Franc started the year with a bang after the Swiss National Bank abandoned its peg that capped the euro at SFR 1.20 per euro. The shock shift in policy led to a sudden appreciation of the Swiss currency with the euro falling to a low of 0.9649 against the franc immediately after the cap was lifted. The euro has since recovered to around 1.05, which would be of some relief to Swiss exporters. Against the dollar, the Swiss franc managed to almost lose all its gains but has since risen to around 0.9285 francs per dollar. Nevertheless, the franc had an adverse effect on Swiss GDP, which contracted by 0.2% in the first quarter of the year versus the previous quarter. But Swiss share prices, which had fallen sharply after the lifting of the peg, have now more than recovered their losses. There have also been global casualties of the currency move in the financial services world such as brokerages and banks, some of which were forced out of business. The immediate danger to the Swiss economy however remains deflation. Annual inflation had already dipped to -0.3% in December but has now accelerated to -1.2% in May. The Swiss National Bank has responded by lowering its deposit rate to a record low of -0.75%. But this has had only limited impact on discouraging excess capital inflows, and as the Greek crisis wrangles on, the Swiss franc maintains its world status as a safe haven.

 

Canadian dollar weakened on oil price and rate cut expectations

The Canadian dollar has historically moved in the direction of crude oil prices versus the US dollar. Oil price’s recent descent has been no exception as the loonie has declined from around CAD 1.06 per US dollar in July 2014 to current levels of around CAD 1.22 per US dollar. The sudden reversal in oil prices took its toll on the Canadian economy in the first quarter of 2015 as GDP shrank by 0.2% from the previous quarter after growing strongly during 2014. Apart from the oil sector, mining activity was also hit and household consumption was weak. Unemployment has remained generally on a downward path but inflation has headed back below the Bank of Canada’s target of between 1-3%, dropping to 0.8% in April. The BoC last cut its overnight rate by 0.25% in January to 0.75% but has resisted further cuts on expectations that non-energy exports will improve, though many analysts doubt whether there will be a significant enough rebound to lift economic growth. Strong jobs and wages growth in May could yet prove enough to add momentum to the economy but even if rate cut expectations recede in the coming months, the Canadian dollar is likely to remain weak for some time as the US Fed gets ready to lift its rates later this year. In the long run, some uncertainty could persist as the economy adjusts to the speed and scale of the fall in oil price and this may dampen sentiment against the Canadian dollar.



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