Scandinavian Currencies Poised to Appreciate Against Euro in 2022

The Norwegian and Swedish kroons/kronas are expected to appreciate against the euro in 2022, overcoming economic tensions caused by the recent resumption of the coronavirus pandemic. Both Norway and Sweden have reintroduced social restrictions to help tackle the omicron variant Covid-19 virus outbreak, but their currencies are expected to continue to rise as their central banks are expected to tighten monetary policies much faster than ECB could harmlessly do accounting for the diversity of the Eurozone economies struggling to overcome the lingering Covid damages. Norges Bank raised its key interest rate in September and again in December last year and says it intends to raise it three more times in 2022, cementing its position as the fiercest hawk in the developed world.

But Scandinavian countries have other factors bolstering their currency strengths. Thus, in Norway, the economy is fueled by a boom in natural gas prices, the country's largest export alongside crude oil, and the currency has been supported by a duly tight monetary policy. Adding oil to the fire is the fact that Norges Bank continues its long-standing policy of daily purchases of kroons on behalf of the government to help pay government spending, despite a record oil-related trade surplus. Forecasting future tax payments from oil companies is a challenging job given the elevated volatility of crude prices, and therefore Norges Bank may wait for actual payments in the coming months before it stops intervening. Until Noway’s central bank changes its stance, higher Nibor interest rates and a stronger Norwegian krone is expected by many European Fx analysts.

A Reuters poll showed that by the end of the year, the Norwegian currency will trade at 9.80 against the euro, as shown by an average forecast, up from the current 10.02.

But what about Sweden? While the value of the Norwegian currency rose against the euro in 2021, exceeding expectations, the situation in Sweden was noticeably weaker. The Swedish krona has gone from being one of the best performing major currencies in 2020 to one of the worst last year – despite a rapid economic recovery – amid global supply chain problems, bottlenecks, and a soft Riiksbank’s monetary policy.

In 2022, markets anticipate that Sweden will face surpassing inflation targets, but economic growth will be robust allowing it to ramp up implementation of policy normalization plans, which could potentially push the currency also higher against the euro. The pace of Riksbank rate cuts will be highly measured though, but still, many analysts believe the rate hikes will happen faster than indicated by the current Swedish central bank’s roadmap, which assumes the first hike in late 2024 only.

According to current estimates, in 12 months the krone will strengthen to 9.90 against the euro. As of today, it is trading at around 10.29, while the median forecast of the participating Fx analysts in the survey was 9.95.