Scandinavian successes are tempting to traders

FOR weeks now traders have described the choice of safe haven currencies as an “ugly contest.” The dollar, yen and euro all have their flaws, so traders have begun to stray. As unlikely as it seems, some have begun to suggest that Sweden could be the answer. Despite the recent slight dollar rebound (see chart) traders are starting to talk about the krona. Record economic growth announced this week and its coming interest rate increases are unquestionably attractive.

This puts the Swedish government in a tricky spot. The prospect of a rapidly appreciating krona from currency inflows could hobble its recovery. Particularly considering that the recent growth spurt was driven by exports from manufacturers such as Volvo, Atlas Copco and SKF. Many believe the record growth was actually achieved thanks to the low interest rate.

Traders will no doubt be asking if this spells trouble: might the government suddenly change tack? Well it doesn’t seem like it: the Riksbank central bank looks committed to increasing rates to combat inflation. It has already announced that its benchmark, currently at 1 per cent, will average 1.3 per cent in the first quarter of 2011 and 2 per cent in the fourth quarter.

Sweden’s SEB bank believes the economy can withstand a bit of currency appreciation. Its recently issued research paper argues that while the krona will continue to strengthen, forecasts show that its strength will not greatly exceed the krona’s average over the past 10-15 years.

This looks good. But how good? Duncan Higgins of Caxton FX says the krona will be attractive to investors particularly at a time when the rest of Europe and America’s interest rates are practically at zero and look like they could stay that way for some time. His prediction is that the inflows could push the euro below SKr9.0 in the medium term.

The Bloomberg consensus of analysts predicts that the krona will appreciate to SKr6.67 per dollar by the end of the year.

While investing in the krona might appear to be an unusual choice, the appreciation it could provide against the euro and the dollar may be precisely what traders hunting for a safe haven are after.