Focus on currencies – NOK and SEK beneficiaries of positive risk tone
The euro, which over the last week climbed to fresh highs following the commitment of ECB president Mario Draghi to take all necessary measures to save the currency, has not been the only beneficiary of increased risk appetite.
The Norwegian krone (NOK) and the Swedish krona (SEK), have been among the best performing G-10 currencies in August, as these currencies tend to be highly sensitive to the general tone of risk appetite.
Nordic currencies have been among the greatest beneficiaries of the pressure felt on the euro over recent months.
Since September 2011, when the Swiss National Bank announced the decision to impose a minimum exchange rate target of 1.20 francs per euro, investors seeking refuge from eurozone troubles opted for Nordic currencies as safe haven alternatives to the Swiss franc.
Both the Swedish and Norwegian currencies share solid economic fundamentals, higher interest rates and little risk of central bank intervention, but they lack the liquidity necessary to become long-term alternatives to the Swiss franc or the dollar.
They are also closely correlated with investors’ appetite to take on risk, limiting a strategy of risk diversification.
“In recent weeks the SEK overperformed most of other currencies, mainly on the back of a very robust and unexpected quarterly growth of 1.4% published at the end of [July], as well as continuous inflow as this triple-A nation is seen as one of the strongest and most stable safe havens in Europe,” said Yannick Naud, portfolio manager at Glendevon King Asset Management
After crossing a 40-years chart support, EUR/SEK traded as low as 8.18 earlier in August. “After this week retracement, I think 8.32 is now a good entry point,” he added.
Naud’s strongest conviction remains on EUR/NOK.
“Second quarter GDP Mainland, excluding oil, gas and shipping was at 1% as expected. We think it is unlikely now for the Norges Bank to cut again interest rates next week, especially given its worryingly overheating domestic housing market,” he said.
“On top of that, the Swiss National Bank has CHF 406bn of foreign currency reserves and will still need to recycle most of their euro purchases. With the 1-year Norwegian government bond yielding 1.5% at the time when Danish and most of core eurozone short term debt is trading at a negative yield, purchasing NOK assets should be an obvious choice”.
Carl Hammer, head of FX strategy at Swedish bank SEB, has been focusing instead on the Swedish currency. According to the strategist, the krona is very close to its long-term equilibrium exchange rate, even after recent appreciation.
“In trade-weighted index terms the Swedish krona has appreciated by over 8% since May to a post-1996 high. Obviously, it is difficult to calculate with any degree of accuracy what a reasonable SEK exchange rate should be, especially as long-term indicators are mixed,” he said.
SEB’s internal long-term equilibrium exchange rate model suggests the crown, having been undervalued since the mid-2000s, now slightly exceeds its long-term trade-weighted equilibrium rate. The International Monetary Fund (IMF) has concluded that the SEK is 5-10% undervalued.
“The IMF found that in order to induce a negative Swedish trade balance, necessary to stabilize the net investment position given positive net investment income, it would require a 25% appreciation above exchange rates prevalent in spring 2012. Indeed, from this perspective the SEK remains substantially undervalued,” Hammer said.
SEB also believes Swedish export companies are becoming less sensitive to fluctuations in the value of the krona, perhaps due to increased globalization.
“As a result, we believe Swedish companies should remain internationally competitive despite a stronger krona,” he said.