With economies of countries using the euro in turmoil from Spain to Greece last year, investors have been looking for a safe haven from the storms of currency market volatility.
The traditional European safe haven was the Swiss franc, but since the Swiss National Bank imposed a currency floor against the euro in September last year, meaning it cannot appreciate above 120 to the euro, investors have shunned that currency. At the same time, the fact that the Bank of Japan has embarked on a program to weaken the yen has dimmed the Japanese currency as a safe haven.
So when the European crisis reached its peak last fall, investors began looking at the Scandinavian currencies — the Norwegian krone and the Swedish krona — as a port in the storm. Initially, the Norwegian currency appreciated substantially, but the country’s central bank, the Norges Bank, cut interest rates repeatedly, including a surprise cut from 1.75 percent to 1.5 percent on March 24. That took the shine off the krone for a while.
As a consequence, interest is now focusing on the Swedish currency. At its last policy meeting, the Riksbank, Sweden’s central bank, left interest rates unchanged, rather than following in the footsteps of its Norwegian colleagues. Since interest rates often determine currency values, the Swedish currency has been gaining ground, not only on the euro, but also the Norwegian krone.
“Sweden does well in terms of external trade balances and in terms of government fiscal balances but it faired less brilliantly when it came to its inflation track record,” says Daragh Maher, currency strategist at HSBC in London. “But now you could argue that it has the characteristics of a safe haven currency.”
What makes a safe haven? Sweden’s consumer confidence reached a nine-month high in April, according to the National Institute of Economic Research and its unemployment rate fell to just 7.7 percent in March. In contrast, in the 17-nation euro zone, joblessness reached 10.8 percent in March, a 15-year high.
“The crisis in the euro zone taught a lot of people to look at the fiscal fundamentals of a country, such as the budget deficit and the debt,” says Jane Foley, senior currency strategist at Rabobank International in London. “If you look at countries like Sweden and Norway, you are confronted with some pretty good data.”
On the other hand, Foley notes, the Swedish krona lacks the kind of liquidity that a major currency like the U.S. dollar or even the Swiss franc offers. For this reason, investors are being conservative in bidding up the krona.
“The problem is if you want to get out of your position in currencies with low liquidity, it’s everyone running for the doors at the same time and in order to get out you may have to take a significant hit,” Foley says.
Under most circumstances, the Norwegian krone would be a better bet because the country is the world’s fifth-largest oil exporter, shipping 2.2 million barrels a day. That brings in a flood of foreign currency with oil at $104 a barrel.
But the Norwegians are mindful of having their currency appreciate too much, damaging trade with the Euroland economies. “The continuing downturn abroad and the strong krone are contributing to keeping inflation low and are weighing on growth in Norway,” Norges Bank governor Oystein Olsen said in a statement after the last interest rate cut in March.
In contrast, the Swedish economy depends on manufacturing exports, and the krona has a strong correlation to the S&P 500 stock index, which is near a four-year high.
Sweden, which cut rates twice last year, decided to keep its repo rate at 1.5 percent on April 18. “Following the sharp slowdown in the Swedish economy towards the end of last year, it is now possible to discern some positive signs,” the Riksbank said in a statement. “Monetary policy needs to remain expansionary to support the recovery.”
HSBC’s Maher says the Norwegian currency is still viewed as “more of a safe haven than the Swedish krona, but its ability to capitalize has been undermined by the interest rate cuts from the Norwegian central bank.”
Rabobank’s Foley says that by some measures, the krona may now even be considered undervalued, especially after the Riksbank surprised the market by holding rates steady. “I think the krona can perform well against its peers, especially with the Norwegians threatening to cut interest rates again,” Foley says.
