SEK no longer immune to euro crisis

The Swedish krona lost some of its safehaven status today, dropping below a rate of SEK9/€ for the first time in over six months, while also falling below SEK7/$.

The change is put down to investors turning to the larger currencies, even the one at the centre of the financial storm (€), simply because bigger is seen as ‘better’ in respects of liquidity and other factors. In a worst case scenario it is simply easier to sell dollar denominated assets, for example, than assets denominated in ‘smaller’ currencies.

There are also domestic issues to consider in terms of a weakening economy, newspaper Dagens Industri quotes Carl Hammer, head of strategy for currency at SEB. Lower economic output suggests weaker interest rates, which other things being equal ought to result in a weaker currency.

However, yields on Swedish government debt are still very low, and the state can borrow cheaply, suggesting investors still view the country as a safe investment.

Another conundrum linked to interest rates is the gap between fixed income yields and dividends from the equity market. Investor publication Privata Affärer notes that Swedish long term rates are being traded at about 1.5%, compared to a stock market yield of 4%. The publication quotes investment research from Enter Fonder, suggesting that over 10 years the difference in return to investors on this basis would be 35%.

Despite the gap, domestic investors contiue to flood to the fixed income area, according to figures from the Swedish Investment Fund Assocation (Fondbolagens förening). Net investments in April in short term interest rate products (money market funds) were SEK5.1bn against net redemption from equity funds of SEK-0.2bn.

 

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