September was another month of low market confidence and risk averse trading. The worsening state of the European banking system, as a result of a continued lack of progress on the eurozone debt crisis, saw investors flooding out of higher-yielding currencies into safe-haven currencies. Concerns over global growth have also been very prominent in recent weeks, with increased speculation of a plunge back into recession for the eurozone, the US and the UK.
However, there have in recent sessions been some signs of progress in the eurozone however, which has been positive for risk appetite. Merkel and Sarkozy have ‘committed’ to providing a comprehensive plan to deal with the Greek issue, the recapitalisation of Europe’s banks, and poor growth in the eurozone. At present this just represents rhetoric and yet another promise, but it has been received enthusiastically by the market. The two EU leaders have set themselves a deadline of November 3rd. In addition, the eurozone bailout reform looks almost certain to be fully ratified by Slovakia, the last member state to accept the fund’s expanded powers.
The performance of the Swedish Krona is being dictated more than ever by international developments than by domestic issues. Accordingly, improved market confidence has helped the krona to recoup some decent ground in the past week or so, after spending September very much on the back foot.
EUR/SEK
The euro benefited from the ECB’s decision not to cut its 1.50% base rate in early October. Speculation was rife that the ECB would lend the ailing periphery a hand, particularly in light of an economic slowdown in the eurozone’s core nations, so the interest rate hold represented a relief. The Riksbank also decided to hold interest rates at 2.0%, which was in line with expectations. Growth has slowed down significantly in Sweden and inflationary pressures are subsiding; the Riksbank has recently confirmed that “the financial crisis has probably lowered the growth rate of potential GDP.”
In line with the Swedish krona’s riskier profile, this pair posted fresh 2011 highs up above 9.35 in late September as fears grew of a messy Greek default and a Lehman’s style fallout. These krona losses have since been corrected and this pair is actually trading flat on the month. Optimism surrounding the chances of some genuine and concrete action in Europe is prevailing at present and it certainly brightens the krona’s prospects.
In addition and importantly, the Troika (the ECB, IMF and EU) has indicated that Greece will receive its next emergency loan in November. Granting further aid to what many believe is a ‘lost cause’ may sound like madness, but the market is inherently concerned with the short-term. This next Greek aid tranche allows EU officials the time to avoid a near-term Greek default and to work on a credible long-term solution.
The market has certainly enjoyed some positive stories of late and risk appetite has clearly returned to favour the krona, but there will undoubtedly be some stumbling blocks to come with regard to eurozone progress (as demonstrated by Slovakia’s recent ‘no’ vote on the bailout fund reforms). Positive sentiment has taken this pair down to 9.16 and the coming weeks look likely to help the krona maintain these levels, though 9.10 will probably provide some fairly stiff support on the downside.
USD/SEK
The dollar performed excellently in September, benefitting from plummeting global stocks and the associated heightened demand for safe-haven assets. The dollar found even more favour because of ongoing issues surrounding the two other haven currencies; the swiss franc is suffering from currency intervention by the Swiss National Bank and threat of similar action surrounds the yen.
However, market confidence is on the up at present and the dollar strength that characterised September has been largely unwound. Still, the greenback will be the key beneficiary of any alarm bells that do emerge out of the eurozone.
The US dollar remains vulnerable to domestic events. At its meeting last month, the US Federal Reserve decided against introducing a third programme of quantitative easing (QE3). Instead, it introduced Operation Twist, in which it sells short-term bonds and buys long-term bonds. The market was noticeably unimpressed but hopes for QE3 remain very much on the table. Should the Fed decide to add further stimulus to the US economy, global stocks would spike and the dollar would suffer a further downward correction on top of what we have seen in recent sessions. We are betting that the QE3 measure will be saved by the Fed for the worst case scenario (another US recession). Consequently, we don’t see this downside risk event occurring in coming weeks, but it is still likely to weigh on investors’ minds.
The USD/SEK rate hit a 9-month high of almost 7.00 in early October, but this climb has been erased and the rate is back down below 6.70. Continued improvements in investor confidence levels may see the rate head down towards 6.50, but dollar losses beyond this look to be a bridge too far.
GBP/SEK
Sterling has suffered as a result of the Bank of England deciding to introduce additional quantitative easing. The MPC voted to increase asset-purchases by £75bn and predictably, sterling has come under severe pressure. Economic data from the UK has been poor of late; indeed the revised second quarterly figure for UK GDP was halved to a paltry 0.1%. It is an equally gloomy outlook for the third and fourth quarter GDP figures, combined with downside risks to inflation and an increasingly dovish-sounding MPC, which makes yet more quantitative easing a real possibility.
Again, the performance of this pair in the coming weeks is very much dependent on how risk appetite pans out. The current rate stands at 10.50, but the recent good news stories of action and commitment in the eurozone should see the krona hang on to its impressive recent gains. That said, sterling’s slide looks a little overdone and further downside too far below 10.50 should be capped.
NOK/SEK
This pair has remained range-bound between 1.16 and 1.19 levels for the past four months or so now, excluding a brief spike to 1.20 in early September as a result of panic related to the Swiss National Bank’s intervention. On a fundamental economic basis, the Norwegian krone shades its Swedish counterpart but there really is very little to choose between these two currencies at present.
The Norges Bank Iooks highly likely to leave interest rates on hold at 2.25% until the middle of next year and the Riksbank will be unwilling to resume hiking until the financial uncertainty in the eurozone has subsided. One major factor limiting the NOK’s upside is that he Norges Bank has made it quite clear that it will not allow the currency to strengthen significantly and is willing to cut interest rates to buffer against this.
This pair is currently trading around the 1.18 mark and it is highly likely that we will see it continue to fluctuate within the 1.16-1.19 range for the next few months.
Richard Driver
Analyst – Caxton FX
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