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Market Update - GBP SEK 26th March 2010
A dip in inflation helped to confirm the Bank of England's view that price inflation will moderate, but it doesn't help sterling is interest rate expectations are firmly anchored at 0.5%. Sweden is one of the only countries with a lower interest rate than the UK, standing at just 0.25%, but the relatively stable . The Consumer Price Index fell to 3% from 3.5%, still well above the BoE's 2% target.
The budget (or should we say the pre election budget, for there is certainly more to come once the election is out of the way!) delivered no market moving surprises, but did remove at least some of the short term uncertainly hanging over the pound. Nevertheless, sterling fell to a two week low against the dollar and other currencies, while the real focus was on the Euro, which posted sharp losses across the board. The fact that Spanish national debt is yielding 3.82% versus 3.97% for sterling 10 year debt indicated that even after this week's heightened fears over the state of the euro zone economies, investors still demand a higher return on UK debt because they view it as a higher risk !
Meanwhile, the Swedish Krona continues to find support amid a housing boom that has helped to enliven an otherwise sluggish economy. House prices were an average of 9% higher in the three months to February, mainly driven by the availability of cheap credit. The Krona has been in demand lately as investors shy away from other European currencies, in particular sterling and the euro.
Yesterday's big story was a credit downgrade for Portugal, prompting renewed fears about Greece. It didn't stop there. Spain is also now being dragged into the rumour mill, and there has been talk of a UK down grade for some time; although the prime minster has recently rebuffed that possibility. Given this spate of sovereign debt stories, it's not surprising to see the Krona benefitting as a relative safe haven in an otherwise tumultuous currency market.
The technical outlook remains negative for sterling. Even after the severe decline in February, we have spent most of March consolidating at the lows. That is indicative of further probably downside to come. We therefore advise buyers of the Krona to act sooner rather than later.
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