John J. Hardy Head of FX Strategy at  Saxo Bank
John J. Hardy Head of FX Strategy at Saxo Bank

Scandie currencies remain interesting to trade

First Published: e-Forex Magazine 58 / Currency Clips / October, 2014

The fates of the Norwegian and Swedish currencies have diverged of late and provided far larger moves and trends in the first eight months of this year than were available in many of the major USD pairs this year. By early September, the Norwegian krone was rebounding strongly versus the Euro from its summer lows as dovish ECB policy moves from June weighed on the single currency. Meanwhile, the Swedish  krona has languished on relatively weak footing and only managed to edge stronger versus the Euro after a drastic weakening in currency the wake of the Riksbank’s July 3 cut of its policy rate by 50 basis points, which took the rate to a mere 0.25%. This contrasts with the wily Norges bank, which has given mixed signals this year, though at present there is little anticipation of a change to its relatively generous deposit rate at 1.50%. 

Going forward, the prospects for the two currencies may converge somewhat, though there still may be greater downside risks to the Swedish krona relative to its sister currency to the West. First, the Riksbank is relatively concerned about the domestic economy’s trajectory and deflationary risks. Sweden has a heavily indebted private sector, particularly in housing, and its economy is also heavily reliant on exports into core Europe, where Germany is showing signs of triple dipping into a fresh weak spot, if not recession. This could even take the Riksbank into a near zero-interest-rate policy (ZIRP), and if could easily become the next central bank to attempt QE if domestic confidence is sufficiently damaged to start a deflationary cycle led by lower housing prices amid a deflating housing/credit bubble. 

The chart above from Saxo Bank’s Saxo Trader shows the Norwegian krone vs. Swedish krone exchange rate, which has exhibited nearly twice the trading range of the USDJPY currency this pair, showing that action and trends in the smaller currencies can often prove more compelling than the goings on in the major exchange rates.

The chart above from Saxo Bank’s Saxo Trader shows the Norwegian krone vs. Swedish krone exchange rate, which has exhibited nearly twice the trading range of the USDJPY currency this pair, showing that action and trends in the smaller currencies can often prove more compelling than the goings on in the major exchange rates.

Meanwhile, the Norges Bank is in a slightly different boat. Norway, like Sweden and all of the small developed economies that adopted very easy interest rate policies in the wake of the global financial crisis, is also grappling with a fearsome housing bubble, but one that is in a more advanced stage of deflating after macro-prudential measures to dampen activity were enacted last year. But the Norwegian economy is far less dependent on exporting finished goods to Europe and far more reliant on a globally critical product: energy. As well, Norway’s inflation levels remain considerably higher than those in Sweden. 

One wildcard for Norway: on the upside, the country exports large quantities of natural gas, where prices could prove particularly volatile if Russia/EU trade tensions heat up this winter. Oil and gas can provide additional strength or potential weakness. Recently, Statistics Norway, cited a survey estimate that the Norwegian oil sector would reduce investments next year by as much as 18.5%, which could set Norges quickly on the path toward more easing, especially if the EURNOK rate dips toward 8.00, as the Norges Bank will act if the NOK strengthens sharply. 

The base case if for the NOKSEK rate to rise from its current 1.1300 level toward 1.170 and perhaps even 1.2000 in the coming six months, but then the rate is like to drop back toward 1.1500 area over the next year, which is the approximate middle of the range of the last five years.