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.