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05 September 2003

EZA 553 - Euro Economy




Probable Swedish 'no' to euro should boost krona, bonds
It is not impossible that the Swedish electorate in the referendum on Sep. 14 could vote to join European Monetary Union and bring the krona into the euro. Latest Demoskop opinion poll figures show the no-vote at 44%, only 5pts ahead of the yes-vote, vs 9pts in the prior canvass. However, the risk is heavily weighted toward a negative response. If this occurs, both SKR bonds and the currency are likely to appreciate. Krona/euro could move back toward 8.50 quite quickly, with 10yr and 5yr Swedish sovereigns reducing yield differentials over Bunds from the respective 53 and 65bp late last week. In our view, risk premia on Swedish assets are too high; fundamentals are sound relative to the euro area aggregate. As for the UK though, it is difficult to see that Sweden has any long-run alternative to joining the euro whatever the outcome of the plebiscite. Swedish GDP is less than 3% of the euro area size and the nation conducts more than 50% of exports and imports with the region. Even if Swedes, like the British, will vote to keep their options open for a few years yet, the choice is, in reality, only between yes now or yes later.

SummaryAsset Conclusions: Probable no-vote in Swedish referendum on Sep. 14 to spark krona, SKR bonds surge, echoing into sterling/Gilt strength vs euro

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© Graham Bishop

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EZA553.pdf


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