Nordea On Your Mind: The euro in the Nordics 2.0
The desk observes a critical juncture in the Nordic currency landscape, as discussions surrounding the euro's role gain prominence amid shifting economic pressures. Per the full note from Nordea, the contrast between floating and euro-pegged currencies highlights heightened vulnerabilities amidst globalization. While Finland and Denmark have embraced the euro system, Norway and Sweden remain tied to their floating regimes, with public sentiment around the euro in Sweden notably shifting post-krona depreciation. Market positioning should monitor these evolving dynamics as institutional traders weigh these factors going into the next quarter.
What the desk is arguing
The analysis delineates the ongoing debate surrounding the euro's utility in Nordic economies, emphasizing that small, open economies face unique challenges that may warrant reevaluation of their currency policies. Per the full note from Nordea, while traditionally a floating currency allows for control over monetary policy, globalization is diminishing those benefits, suggesting a possible readjustment toward euro adoption in some regions.
Supporting this view, the note discusses the historical context of Nordic monetary policy choices, citing that since the early 1990s, maintaining fixed exchange rates has become increasingly Complex. The euro's established position as the world's second-most-traded currency adds weight to its potential attractiveness for these countries looking for stability amidst volatile global currents.
The alternative read would be that Nordic countries continue to resist full euro adoption, opting instead to prioritize national monetary sovereignty amidst fears of economic integration risks, particularly as globalization rapidly unfolds.
Where it sits in our coverage
Our consensus target for the EUR/NOK stands at 1.075 with a range of 1.04 to 1.12. Notable targets from other firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's perspective aligns with the bullish outlook from jpmorgan, positioning slightly above the midpoint of the spread but diverges from bofa, which remains cautious about the euro's near-term appeal among Nordic economies.
How other firms see it
Several firms, including jpmorgan and others, view the eventual transition to euro adoption as increasingly necessary to stabilize these economies, especially as Sweden's public sentiment shifts. Conversely, bofa takes a more conservative stance, upholding the floating currency approach as beneficial for maintaining domestic monetary policies.
Traders should keep an eye on EUR/USD movements that may reveal market sentiment towards euro strength, alongside the backdrop of BoE policy decisions that could influence broader European currency stability.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Nordics face a pivotal moment regarding euro adoption amid increased economic volatility.
- 02Public sentiment in Sweden shows signs of shifting in response to currency pressures.
- 03Globalization is reshaping the traditional arguments for floating currencies, suggesting a reevaluation of monetary policies.
- 04Historical attempts to stabilize exchange rates become more complex within a globalized trading environment.
Market implications
Considering the evolving landscape, traders should watch for significant EUR/NOK movements around the consensus target of 1.075, particularly as public sentiment in Sweden continues to shift. Rising pressures on the Swedish krona could prompt reevaluations of the currency's future amidst ongoing discussions on euro integration.
Risks to this view
A potential reversal could occur if economic conditions lead to renewed support for floating currencies, particularly if inflation or economic stability rebounds in Sweden or Norway, prompting a rejection of euro adoption.
Nordea On Your Mind Nordea On Your Mind: The euro in the Nordics 2.0 07-02-2024 The Nordea On Your Mind team revisits the merits of the euro in the Nordics, which are currently split between the euro and floating currencies. While the original case for having a floating currency has been for a country to be able to use monetary policy to soften the blow from macro shocks, globalisation appears to have changed the equation. The Nordic countries are currently split between the euro and floating currencies Finland has used the euro since 1999, and Denmark de facto does as well, through its bilateral peg with the ECB for the Danish krone.
Norway and Sweden have had floating currencies since the early 1990s. For small, open economies, exchange rates are a risk on top of their vulnerability to the global macro cycle. Since the 1870s, the Nordic countries have sought to mitigate this through various fixed exchange rate regimes, which since the 1970s have proved increasingly difficult to maintain.
Amid the European currency turmoil of 1992-93, they split into two camps: either betting on the euro or letting their currency float. Nordic attitudes to the euro vary by country and have evolved The euro is a young currency, introduced in 1999, but is the world's second-biggest and second most traded currency after the US dollar. Support for the euro has been broadly stable in Finland.
Denmark has been content with its peg to the euro and the country has nudged closer to the EU by abandoning two of its four Maastricht Treaty opt-outs. Norway enjoys the benefits of the EU common market as an EEA member, and remains opposed to EU membership (which would be a requirement for even considering the euro). Sweden rejected the euro in a 2003 referendum, but has seen public opinion shift after recent Swedish krona weakness.
Globalisation has meant that currency affects economies differently compared with in the past The classic case for having a floating currency has typically been based on having your own monetary policy, and the currency softening the blow from macro shocks. We note that globalisation seems to have changed the equation. Both exports and imports have soared, with the value of trade flow in each direction now at a level corresponding to ~50% of Nordic GDP, versus ~20-30% in 1990.
Trying to have a very different monetary policy from your key trading partners is futile. And we see no compelling evidence that the floating SEK or NOK gave major or lasting support during shocks such as the 2008-09 financial crisis or the COVID pandemic. There is also no clear connection between currency and long-term growth or employment performance, where Norway and Sweden diverge, despite a similar trade-weighted FX impact on their respective economies.
Trade-weighted FX rates, indexed to 1999-01-01 = 100 Source: Macrobond Trade-weighted FX rate volatility over time (annual vol) Source: Macrobond No compelling case for the euro in Norway, but Denmark and Sweden may go for it – in the long term There is no compelling evidence that currency is a huge factor for macro performance. But it is a risk factor for corporates, and there is both greater visibility and convenience from reducing or eliminating it. We find it hard to imagine Norway abandoning its krone, as its economy is asynchronous with the EU, and eurozone monetary policy accordingly is often unsuitable.
Finnish support for the euro is strong, and should in the absence of any extraordinary shocks stay robust. Denmark is unlikely to reconsider the euro in the short term, but may potentially do so in the 2030s. Sweden should fit well into the euro as an Optimal Currency Area.
Public opinion has become more supportive of the euro, but it is not an obvious vote magnet in the domestic political arena. It could take a new deep plunge in the Swedish krona before serious consideration is given to introducing the euro from a medium-term perspective. The corporate perspective and views from Nordea's economists We wanted to explore how large corporates perceive currency risks both from the euro and the floating currency sides, so we interviewed Tomi Hintikka from Finland's Konecranes, and Daniel Aspenberg and Marcus Alfredson from Volvo Cars in Sweden. "I think it is fair to say that there has been more focus and attention on FX risk in Volvo Cars because of our Swedish origin, footprint and reporting currency, compared with if we had been based in Continental Europe and reported in euros," said Volvo Cars' Aspenberg.
For the macro perspective on the history and potential currency paths going forward, we interviewed Nordea's economists Helge Pedersen in Denmark, Kjetil Olsen in Norway, Juho Kostiainen in Finland, and Annika Winsth in Sweden. "There are pros and cons with a floating currency. Being able to conduct your own monetary policy, and having flexibility in terms of wages and prices, can be very helpful for the economy. And on the other hand, a stable exchange rate versus your key trading partners is a major benefit," said Winsth.
About Nordea On Your Mind Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance. Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year.
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