CITY AM: “Krona And Krone Won’t Be Safe-Haven Kings”

Sweden and Norway’s currencies are too illiquid to compete.
Along with Apple’s shares plummeting 50 per cent in value,
Australia’s looming recession and wheat doubling in price, in its
self-styled outrageous predictions for 2012, Saxo Bank speculates
that Sweden and Norway could replace Switzerland as the safe haven
currencies of choice. But could Sweden’s krona or Norway’s krone
really become the security blankets for the world’s forex traders?
With the Swiss National Bank’s seemingly unremitting determination
to keep its currency from rising, it is a prediction worthy of
consideration.

TWO ROADS DIVERGED

There are two distinct visions of Sweden’s fate as a safe haven.
Rishi Patel of FairFX is a believer, while IG Index’s Chris
Beauchamp is sceptical. Patel points to the Sveriges Riksbank’s
(Sweden’s central bank) swift response to the financial crisis and
the economy’s rebound from the European sovereign debt crisis. The
Swedish government now pays less than Germany to borrow money.
Patel adds: “Swedish output is expected to grow 4.2 per cent this
year, nearly three times that expected from the Eurozone and US,
while Sweden’s government debt is expected to decline to 36.3 per
cent of the economy this year (compared with the Eurozone average
area of 88 per cent).” As such, he thinks the “Swedish krona will
certainly be a contender for safe haven status in the coming
year.”

In contrast, although Beauchamp agrees that Sweden recovered
fairly well from the crisis in 2008-9, he points out that like the
UK, much of its trade is done with Europe. As such, “it cannot be
said to be entirely immune from the Eurozone situation.” He thinks
this will count against the Swedish krona, but says the main thing
counting against the currency is its lack of liquidity. Beauchamp
says: “Although it’s the ninth most traded currency, it has a much
smaller share of daily trades than even the Canadian dollar, and is
far behind the big four.” He concludes: “Moves can be more dramatic
due to the lack of liquidity, which will make traders nervous about
putting too many of their eggs in this particular Nordic basket.”
This point on liquidity is key.

DAMPENED BY LOW LIQUIDITY

Pointing to Norway’s consistently positive current account
balance in recent years, Kathleen Brooks of Forex.com says on paper
it should be the ultimate safe haven; but she adds that old habits
die hard. Like the Swedish krona the Nokkie lacks liquidity, as
well as being heavily tied to the demand for oil. Brooks says we
have seen this before with another commodity currency: the
Australian dollar. Just when people started describing the Aussie
as a safe haven, it plummeted in value against the dollar.

Alistair Cotton of Currencies
Direct says: “In theory a robust domestic economy
translates into a strong currency, but safe haven status is as much
about liquidity as it is about economics, and in that respect the
krona and krone do not come close to the dollar, yen or Swiss
franc.” In fact, he thinks “the relative safety of the krona and
krone would almost certainly be eroded if they saw huge inflows,
because the relatively small size of both markets means if everyone
ran for the doors at the same time – as usually happens in currency
markets – both currencies would see massive levels of volatility to
the downside.” Ironically, their safe-haven status depends on the
majority of market participants not viewing it as such.
Cotton says: “In a crisis, you need to be able to
exit positions quickly and with the krona and krone making up less
than 4 per cent of global trade, its going to get crowded quickly
if there is a step change towards their perceived riskiness.”

Although often dismissed as an amusement, thinking through
unlikely predictions forms a crucial facet of scenario planning –
famously used in the 1970s by Royal Dutch Shell to anticipate a
decline in the price of oil. However, in this instance it seems
unlikely that Saxo’s “outrageous prediction” will come to pass. It
is much more likely that 2012 will be the year of the US dollar.
Richard Driver of Caxton FX and Cotton both voice this expectation.
The former says: “With no risk of intervention hanging over it, we
still favour the US dollar as the safe-haven currency of choice in
2012,” while the latter says “there will be only one safe-haven
currency in 2012, and that will be dollar.”

There are good reasons to agree with these assertions – but once
again, dollar’s continued dominance shouldn’t be assumed. After
all, the Fed might actually turn the quantitative easing taps on
again.

Report Philip Salter

Original Source: City AM  – Wealth Managamenet
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