Forex Investment and Currency Trading

Risk Aversion Provides a Negative Backdrop for NOK and SEK

While there has been much focus on the recent sudden weakness of the NOK and SEK since the beginning of September, this weakness comes after relative stability since the beginning of the credit crunch compared to the other majors which have recorded far greater shifts stronger or weaker on a broad TWI basis. That said, it appears that NOK and SEK are at least starting to catch up. Indeed on the EUR crosses both NOK and SEK have reached multi-year highs comparable with previous crises.

The rapid weakening of both currencies coincides with the broader back drop of heightened risk aversion. It is typical for both currencies to under-perform during periods of risk aversion, and indeed the reasonable correlation between both EUR/SEK and EUR/NOK and equity markets is testament to that. The weakness of both currencies also reflects the broader deleveraging environment currency characterising FX market movements.

Outlook for NOK and SEK

• In the near-term, NOK and SEK are likely to remain vulnerable to risk aversion in light of the
  macro back drop and the ongoing vulnerabilities of the specific domestic factors. However
  there are also reasons to believe this move has overshot.
• Fundamentals are also likely to become a stronger driver of investment intentions as the
  banking crisis fades. While it’s expected slower growth in both Norway and Sweden from the
  stellar performances of the past couple of years, market forecasts envisage both countries holding up relatively better in comparison to the rest of Europe in 2009.
• Finally, both countries will likely still run current account surpluses thus providing a positive
  external back drop. Added to which, the BBoP dynamics of both NOK and SEK were positive
  for both currencies at least ahead of this financial turmoil. When the market firmly shifts its
  focus back to the fundamentals both currencies are likely to benefit.