This summer, the krona has weakened against several major currencies, including the dollar and the euro.
Amanda Sundström, a currency strategist at the Swedish bank SEB, attributed this decline to several factors: firstly, the country's central bank, the Riksbank, is expected to lower interest rates more rapidly than other central banks, contributing to the krona's weakening. Additionally, increased global economic uncertainty and a seasonal "summer effect" characterised by lower market turnover are also pressuring the currency.
READ MORE: What could low inflation mean for foreigners in Sweden?
British pound shows signs of strength
Last week, the pound-to-krona exchange rate stood at 13.74.
At the time, Lee Hardman, an FX analyst at Japan's MUFG Bank, predicted that the krona would continue to decline, especially after failing to sustain gains from the previous months.
One significant issue is Sweden's faster-than-expected decline in domestic inflation, which dropped to 2.3 percent in June.
This allows the Riksbank to consider up to three more interest rate cuts in 2024. In contrast, UK inflation fell to 2.0 percent, with economists warning of potential upside risks, leading the Bank of England to approach rate cuts cautiously.
"The GBP currently has the strongest upward momentum amongst G10 currencies. The UK election result has created a more favourable backdrop for the GBP. The large majority for Labour should ensure a period of much-needed political stability in the UK," Hardman said.
Recent UK economic data further supports the pound's strength. The UK GDP surprised many commentators with a 0.4 percent month-on-month growth in June, exceeding expectations.
This stronger economic momentum and the Bank of England's concerns over persistent inflation risks suggest that rate cuts may be delayed until later in the year.
The krona's undervaluation
According to the IMF's annual External Sector Report, the Swedish krona is significantly undervalued. In fact, the IMF singled out the krona as the world's most undervalued currency.
Following a 6.4 percent devaluation over 2023, the krona is estimated to be between 10.6 percent and 23.5 percent undervalued, with a midpoint of 17 percent.
Since its floating in 1993, the krona has depreciated by 20.3 percent and was about 17 percent below its 30-year average in 2023.
Despite its underlying strengths, such as consistent trade surpluses (where Sweden's exports exceed its imports), high productivity, solid public finances, and a credible central bank, the krona has been on a long downward trend.
To find out more about what this means and whether the krona is overdue for an increase in value, check out our in-depth article on the issue, here.
Real-life impact on Brits in Sweden
For Brits in Sweden, any decline of the Swedish krona against the British pound has several significant implications.
Firstly, travel back to the UK becomes more expensive. With the pound stronger against the krona, flights, accommodation, and other travel-related expenses in the UK cost more when converted from krona. This increase can make trips home pricier than before.
However, money kept in pounds becomes more valuable against the krona, benefiting Brits with savings or income in pounds. When converting pounds to krona, they receive more for their money, which can help cover living expenses in Sweden.
Additionally, for those transferring large amounts of money, the stronger pound provides better value for money. Converting significant sums from pounds to krona can yield a higher return, making it a good time for large purchases in Sweden.
On the flip side, a stronger krona might not always mean cheaper summer holidays in Europe, as SEB's chief strategist, Johan Javeus, warned in June.
Rising prices on the continent have offset potential savings, leaving purchasing power essentially unchanged.
However, Javeus pointed out that Swedish tourists who want to spend their summer abroad can find more affordable travel options outside Europe, particularly in several Asian countries, as the krona recently strengthened against several currencies in the region.
The road ahead for the krona
After a period of significant volatility, the Swedish krona is expected to gain support from decreasing domestic risks and positive external developments, according to Rory Fennessy, a senior economist at the advisory firm Oxford Economics.
"The Nordic currencies have been highly volatile this year. The Swedish krona and Norwegian krone both depreciated sharply until May but have since regained much of their losses," Fennessy said in a recent analysis.
READ MORE: Why the Swedish krona is expected to strengthen in the year ahead
"We believe both the Swedish krona and Norwegian krone will appreciate gradually this year and over the medium term, but there may be bumps along the way due to external factors and unexpected data."
Earlier this year, the Swedish krona weakened due to stronger-than-expected US economic activity and inflation. This led to changes in interest rate expectations and negatively affected Nordic currencies.
However, recent US economic data has been weaker, and Nordic central banks have adopted stricter policies to protect their exchange rates.
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