No Swedish Surprises

The Swedish Kroner is trading at 8.43 against the Euro currently and it seems there will be no surprises from the Swedish currency in the near future. The EUR/SEK has been on a downward trend for the past two years and this trend is expected to continue.

Since the financial crisis of 2007-08, the SEK has been treated as a safe haven currency. One relationship illustrating this is the Spanish USD 5year CDS versus EUR/SEK developments. With the recent mini crisis of confidence in the EUR sparked by Cyprus, the SEK has strengthened against the EUR as more investors place bets that the eurozone crisis is far from over. Furthermore, international investors are keen to diversify their portfolios and there is a flight to quality assets as investors buy to hold in the Swedish asset markets, which are all positive for the SEK.

The Swedish corporate FX accounts have increased again as the economic outlook has become more uncertain during the last few months and more recently with Cyprus. This source of liquidity is positive for the SEK once the economic outlook turns for the better and SEK will likely continue strengthening against the EUR in 2013. Most likely the bulk of this reserve will be used for FDI purposes, yet the current uncertain environment makes companies await better times and opportunities to use this cash.

Conversely, Swedish economy indicators tell a sobering story. Growth bottomed out in Q4 of 2012 at 0.1% giving annualized growth rate of 1.5%. Sweden is not a member of European Monetary Union, but 40% of its exports go to the Eurozone, which has been in recession – therefore Swedish growth has been constrained by outside circumstances. Yet the past few months have shown positive signs for the SEK against the EUR. Swedish unemployment has lowered slightly to 7.8%. Consumer confidence increased to 2.80 in March 2013 from -1 in February. Business confidence in Sweden also rose in March to 4 from 0 in February. In addition, Sweden have recorded their lowest Government Debt to GDP ratio in 20 years, of 37.7%. These are all positive signs for the SEK as investors note that Sweden’s economic indicators fare better than elsewhere in Europe.

There are a few other factors that will maintain a course of SEK strength against the EUR. The Riksbank’s, Swedish central bank’s, shift to a neutral monetary policy stance bodes ill for the SEK and we will likely see continued depreciation vis-a-vis the EUR. Additionally, the SEK is a small and vulnerable currency in risk-off markets, therefore there is a clear tendency for the market to pay up for calls when spot prices move higher. Hence we would be surprised to see EUR/SEK trade all the way back to 9.00 unless something very positive occurs for the EUR.