Krona Rises on Franc as Traders Seek Germany Without Greece
June 13, 2011, 3:32 PM EDTBy Liz Capo McCormick, Lucy Meakin and Lukanyo Mnyanda
(Updates prices in seventh paragraph.)
June 13 (Bloomberg) -- Sweden’s krona is joining the Swiss franc as a favored currency for traders seeking to profit from Germany’s economic expansion while avoiding the debt crisis roiling Europe.
The krona may climb to its highest level in more than 10 years against the euro as the fastest growth in Europe spurs the Riksbank to keep raising interest rates, according to data compiled by Bloomberg. It’s a cheaper way to participate in German growth than the traditional haven, the Swiss franc, which is the most overvalued currency against the euro and the dollar as measured by the relative cost of goods and services.
Sweden’s economy grew an annual 6.4 percent in the first quarter after 5.7 percent last year, the most in the region. Higher rates than in the euro area haven’t hurt exports fueled by Volvo AB and Ericsson AB. The krona is only “starting to approach” a “reasonable” level, central bank Deputy Governor Lars Nyberg said in an interview in Stockholm last week.
“The Swedish economy is in good shape,” said Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. “If there is a deterioration in European financial stability then it’s realistic to believe that Sweden will do relatively better than Switzerland. Sweden is just as strong a safe-haven as Switzerland.”
RBS told its clients on May 6 to sell the franc against the krona.
Krona Gains
Sweden’s currency may climb 3.6 percent against the dollar and about 4.4 percent versus the euro this year, while the franc will probably weaken 9.4 percent by Dec. 31 compared with the greenback and slide 6.9 percent against the European common currency, according to median forecasts in surveys of analysts by Bloomberg.
Investors are betting the pace of the krona’s appreciation against the euro may start to gain on that of the franc, which has climbed more than 15.3 percent versus the common currency over the past year, according to data compiled by Bloomberg. The krona, which rose 5.1 percent, was the second-best performing major currency versus the euro, the data show.
The Swedish currency fell 3.1 percent to 6.3273 per dollar last week, retreating further from its near three-year high of 5.9789 per dollar on May 2. It was down 1.2 percent versus the euro at 9.0800. The franc declined 1.1 percent to 84.30 centimes per dollar and climbed 0.9 percent to 1.20978 against the euro. The krona was at 6.3246 per dollar as of 3:11 p.m. in New York, while the franc traded at 83.77 centimes against the greenback.
Yield Differences
Relative bond yields are luring investors to the krona. Sweden’s two-year government notes yield 2.41 percent and the gap between the securities and similar-maturity Swiss debt widened to 2.10 percentage points last week, from 1.39 percentage points at the start of the year. The Swedish securities yield 0.89 percentage point more than those in Germany, down from 1 percentage point in January.
The Swedish currency and the franc have benefited as Europe’s leaders led by German Chancellor Angela Merkel struggle to hammer out a second Greek aid package by the end of June.
Last year’s 110 billion-euro ($158 billion) rescue failed to prevent an investor exodus from Greece, which will have debt at 157.7 percent of gross domestic product this year, the highest level in the euro’s history, according to the European Commission on May 13. Ireland and Portugal also sought aid as record deficits sent borrowing costs soaring. Sweden is a European Union member that doesn’t participate in the euro.
“If you are buying the Swedish krona you are getting European growth without Greek politics,” said Nick Parsons, head of markets strategy in London at National Australia Bank Ltd. “You can make a solid case for the strength of the krona persisting and for it continuing to be one of the two strongest currencies in the world.”
Purchasing Power Parity
The Swiss franc is the most expensive currency based on the relative costs of goods and services as measured by the Organization for Economic Cooperation and Development. It’s 36 percent overvalued versus the euro, almost twice that of the krona, according to purchasing power parity, which measures long-term exchange rates by determining ratios of prices for tradable goods and services between countries.
Sweden has the ninth most-actively traded currency, accounting for 2.2 percent of the $4 trillion average daily turnover in foreign exchange last year, according to the Bank for International Settlements in Basel, Switzerland. The franc’s 6.4 percent share makes it the sixth most-traded currency.
The krona isn’t immune to Europe’s troubles. The currency is sensitive to changes in world growth and may underperform if the global economy slows, according to Claire Dissaux, the London-based managing director of global economics and strategy at Millennium Global Investments, which manages about $12 billion.
‘Cyclical Currency’
A slowing global economy “wouldn’t make me bullish on the Swedish currency versus the euro,” Dissaux said in an interview. “It’s very much a cyclical currency” that may fall on poor news from the U.S. and elsewhere in Europe, she said.
Rising unemployment and falling home prices in the U.S., Europe’s debt crisis, Japan’s March 11 earthquake and tsunami, and signs of a slowdown in China have fueled concern that the expansion will falter.
The krona fell 1.1 percent against nine major currency peers in the month after Portugal’s financial rescue on April 6, while the franc jumped 4 percent, Bloomberg Correlation-Weighted Indexes show. In the year that followed Lehman Brothers Holdings Inc.’s collapse in September 2008, Sweden’s currency dropped 4.5 percent, while the franc advanced 7.2 percent, the indexes show.
The krona’s performance in the face of Europe’s fiscal troubles has won over Societe Generale SA, which predicts it may strengthen to 8.70 per euro by year-end.
‘Personal Favorite’
“It’s our personal long-term favorite” in the region, said Sebastien Galy, a senior currency strategist at Societe Generale in London. “You have a good German story but you can’t buy Germany because you have to buy the euro. If you think Germany is just going through a mild slowdown, then you will hold on to your krona positions.”
Germany, which bought 10 percent of Sweden’s exports in the first quarter, may expand 3.3 percent this year, according to the median of 24 analyst forecasts compiled by Bloomberg. Sweden’s economy will probably grow 4.5 percent, a separate survey shows. Swedish growth is prompting speculation that the central bank will raise rates to cap inflation.
The Riksbank has increased the key rate six times since July to 1.75 percent, and has signaled it will reach 2.5 percent by the end of the year as the labor market tightens and inflation exceeds the central bank’s 2 percent target. The bank has also sought to cool the housing market, where prices rose even as the economy contracted in 2009.
‘More Reasonably Valued’
“We’ve said for at least 10 years that the krona has been undervalued and ought to strengthen a bit,” the Riksbank’s Nyberg said in the June 7 interview. “It’s now starting to approach a level that’s more reasonably valued than it has been during the last 10 years.”
A stronger currency makes imports of oil and other goods cheaper, curbing inflation. So far, it hasn’t hurt exporter profits.
Volvo’s “mature markets are recovering,” Chief Executive Officer Leif Johansson said on April 27 in a statement detailing first quarter earnings. The Gothenburg, Sweden-based company also raised its industry forecast for heavy truck sales in North America and Europe.
Record Profit
SKF AB, also based in Gothenburg, said on April 19 that first-quarter profit rose to a record as the world’s largest maker of ball bearings reported sales to industries in all regions grew. Stockholm-based Ericsson, the biggest maker of mobile-phone networks, said April 27 that first-quarter profit more than tripled on demand for wireless broadband equipment.
While the Riksbank is tolerant of the krona’s gains, the Swiss National Bank has attempted to weaken the franc.
The franc in real terms, which adjusts for relative inflation levels, is near a record high against a trade-weighted basket of currencies and versus the euro, according to calculations by RBS
SNB Governing Board member Jean-Pierre Danthine said on May 20 in St. Gallen, Switzerland, that the currency situation is “very challenging,” calling the franc “very strong.”
The euro will depreciate to less than its 2011 low of 8.7 versus the krona within six months, according to Alan Ruskin, the New York-based global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG, the world’s largest currency trader, according to Euromoney Institutional Investor Plc.
“You have both a favorable rates and a valuation story on the krona,” Ruskin said. “It’s the right trade to lean toward.”
--With assistance from Johan Carlstrom and Toby Alder in Stockholm and Yoshiaki Nohara in Tokyo. Editors: Philip Revzin, Daniel Tilles
To contact the reporters on this story: Liz McCormick in New York at emccormick7@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net; Lukanyo Mnyanda in Edinburgh News at lmnyanda@bloomberg.net
To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net
