Retreating to the safety of the krone

 
Yannick Naud

SINCE the Swiss National Bank’s (SNB) decision to de-facto peg the Swiss franc to the euro on 6 September, investors have been scrambling for alternative safe havens in order to allocate part of their liquid cash position. Gold’s violent drop in value during the second half of September has made this quest for safety even harder.

However, in order to rationally decide which currency is really safe in this current environment, investors should step back and analyse fundamental factors – the most important being the creditworthiness of the underlying country.

RATING THE RATINGS
As per Moody’s, Standard & Poor’s and Fitch, only 14 countries are still AAA rated. But as the table above shows, not all AAA rated countries are equal, and the credit default swap (CDS) market is now pricing these countries very differently.

The widest AAA CDS is now France at +172 bps, and Norway is in the strongest position at +46 bps, followed by Sweden, Switzerland and Finland.

Other sources are confirming this analysis. Ratings from Dagong Global Credit Rating based in Beijing are also interesting, especially given the fact that China’s State Administration of Foreign Exchange (SAFE) is now one of the largest sovereign-wealth funds. According to the agency, the list of AAA countries – in both local and foreign currency – is rather small: Norway, Denmark, Finland, Luxembourg, Hong Kong, Singapore and Switzerland.

NON-INTERVENTIONISM
The second important factor to consider is the underlying countries’ monetary policy – whether the authorities are ready and willing to intervene in order to weaken their currency.

For example, Japan’s long history of market intervention should rule out the yen as the next long-term haven currency.

On the other hand, Norway’s central bank governor Oystein Olsen, while stating in early September that liquidity in the currency was probably too low for it to be considered a safe haven, added that: “Investors must realise that the door is narrow when they want to leave the krone” and that he could consider cutting interest rates. He has always dismissed any speculation that they will intervene to weaken the currency.

Furthermore, Norge Bank has left the key rate on hold, at 2.25 per cent, for the third rate-setting meeting in a row. It has stated that it has “no opinion on a specific normal band or any equilibrium level for the krone.”

Given Swiss franc-Norwegian krone price fluctuation since 2008, a relatively low historical correlation with equity markets, and taking into account extremely low absolute levels of debts, and our forecast of an even stronger fiscal position (the economy expanding by 2.75 per cent in 2012, with record low unemployment of less than 3.3 per cent), our medium term target for Swiss franc-krone is now 5.75kr. This implies a potential capital gain of more than 8 per cent versus the Swissie including a telling differential of interest rate. If traders are willing to face the chance of the illiquid krone overheating, then Norway is the haven for them.