by Jason Jenkins, Investment U Research
Wednesday, August 1, 2012
Oh, the euro. Back in the 1990s, you were such an attractive concept. But you had way too many flaws that were overlooked. And now, two decades later, you’re the currency that’s taken the world to the brink of global catastrophe.
Due mostly in part to the PIIGS of the European Union – and the northern EU members’ inability to deal with the problems in the South – the world is facing a currency crisis. Investors for the last few years have been in search of a currency safe haven to buffer against market volatility.
The historical European safe haven was the Swiss franc. I actually wrote a couple of articles about it a year ago. However, the Swiss franc hasn’t been en vogue since the Swiss National Bank put in the works a currency floor against the euro last September. What this means is that the currency cannot appreciate above 120 to the euro.
So at the height of the EU crisis last fall, currency investors started to look at Scandinavia. What they found were the Norwegian krone and the Swedish krona as safe havens. Since then, after appreciating substantially, the krone lost a lot of its luster when the country’s central bank repeatedly cut interest rates. Then there was one – and that one is one of the last gems out there right now.
The Swedish Krona is Hot
Almost two weeks ago, the Swedish krona (SEK) reached strengths versus the euro it had not seen since October 2000. The European sovereign debt problem continues to get worse, causing strong demand for assets outside the EU. Sweden’s currency appreciated 0.6% to 8.4488 per euro by late Friday July 20. The currency rose 1.9% that week.
The krona has been trending upwards due to rumors that the Riksbank – the central bank of Sweden – will hold off on halting gains in the currency. These rumors gained credence when the minutes of the Riksbank’s July policy meeting were released last week. According to Central Bank Governor Stefan Ingves, the krona may strengthen “given the economic developments in Sweden.” The central bank kept its key interest rate at 1.5% on July 4. It had lowered it twice since December. The minutes from that same meeting also announced a readjustment of Sweden’s growth rate this year from 0.4% to 0.6%.
Not Too Late…
In a note to clients, HSBC stated that the krona “appears to be in the midst of an upwards re-rating by the markets which could well see its strength continue and extend.”
And here in a nutshell is what they listed as the factors boosting the currency:
- As we have seen for quite some time, EU issues are pushing down the euro against other currencies.
- The latest interest rate cut by the ECB has increased the rate gap between Sweden and Europe in the krona’s favor.
On top of that:
- Sweden is rated “AAA” by all three ratings agencies.
- The country has a very workable public debt level that is 35% of GDP. Compare that with its peers. Total debt for the Organization for Economic Co-operation and Development (OECD) countries went from 73.3% of total OECD GDP in 2007 to a forecasted 106% in 2012.
- The country’s budget balance is right around even, which strategists say opens the door for any fiscal stimulus if needed.
- Forex reserves are sufficient at about 15% of GDP. Not an overabundance of reserves but enough to be able to help in case of any currency issues.
- It’s true that Sweden has some exposure to the EU crisis, however its main trading partners aren’t necessarily all EU members. It’s likely it could come out of this without any critical damage if the Union implodes. Swedbank CEO Michael Wolf stated, “Sweden looks very robust in the context of the European debt crisis and Swedish banks are performing extremely well in this environment.”
- And finally, we come to the large current account surplus – and it appears that export volumes are holding up. The broad measure of trade signifies that the Swedes don’t have to rely on foreign capital or outside creditors to fund a trade deficit, like the current situation we find ourselves in.
As for Valuation…
HSBC has looked at the purchasing power parity between the krona and other currencies. Purchasing power parity (PPP) is a method used to figure out what a currency exchange rate should be. It goes along the lines that currency exchange rates between two countries should be at a place where you could buy something at the same price in either country. HSBC’s analysis found that the krona is 5% “cheap” in relation to the Japanese yen (JPY), 16% cheap to the Swiss franc (CHF) and 19% cheap to the Norwegian krone (NOK).
Plus, in a global climate where policymakers are attempting to keep their currencies in check, Swedish administrators don’t seem too worried about the strength of the krona. HSBC strategists summarized that, “In a global ugly contest, SEK appears increasingly attractive, and it seems likely that its recent strength will be continued and extended. We now expect the recent gains to be extended by another 5% by the end of the year.”
JasonLooking for a New Safe Haven Currency? Try the Swedish Krona,