Thursday, October 16, 2008

Swedish Krona, South Korean Won Tumble

I have long believed that the Swedish krona has been undervalued from a fundamental point of view. But since it is perceived to be more risky, and because I believed that the financial distress would continue I didn't think it would rise anytime soon.

Usually, the Swedish krona only moves very little against the euro, but yesterday it tumbled some 3% against the euro and in late trading, a euro for the first time rose above 10 SEK. Or to put it another (inverted) way, the krona fell below €0.10. As the U.S. dollar rose against the euro, the decline was even more dramatic against the U.S. dollar, but the USD is far from all time highs.

I am not sure about the cause of this dramatic movement as there was no news that would trigger this kind of dramatic movement. But a small part can probably be explained by the stock market sell-off today which as previously noted is bad for the Swedish krona, and Swedish media speculate that attempts by Swedish financial institutions to rebalance their portfolios after the latest turmoil could have contributed. And as usual with financial markets, this triggers automatic selling from fund managers with stop-loss rules which further deepens the decline in a vicious spiral.

That the krona becomes even more undervalued than before is very beneficial for Swedish exporters of course. But it also means that inflation won't fall as much as elsewhere, which will limit the extent of further interest rate cuts by the Riksbank.

Meanwhile, while the currency of its neighbor and closest competitor, Japan, is at record levels, the South Korean won is tumbling against virtually all other currencies (except for the Icelandic krona and Zimbabwe dollar). It fell nearly 10% against the U.S. dollar today and now stands at 1,377 per dollar. As late as mid-2007, it took only slightly more than 900 won to buy a U.S. dollar. The cost of buying a yen has similarly risen from 7.5 won to 13.8 won during that period.

The effect of this is likely to be a lot more negative for South Korea than the effects of the weak Swedish krona on Sweden. This is because first of all, the won has tumbled a lot more than the Swedish krona. And secondly because Korean companies and households have much larger foreign currency denominated debt. As the won tumbles, the won value of these foreign debts soars. Indeed one of the triggers for today's massive decline was concern that trouble would arise over these debts. But as these troubles get worse because of the decline, a vicious spiral is created. This is similar to what happened during the financial crisis in Asia 1997-98 and more recently in Iceland. As South Korea was one of the countries that was hit hardest in the 1997-98 crisis, one would have thought that they would have learned the perils of taking on too large foreign currency denominated debt, but apparently they didn't learn their lesson, so now reality will teach them that lesson again.


Anonymous nin said...

could you write about the sub-prime effect on the Swedish bank? I heard some bank ,like , Swedbank suffer from the loss

3:29 PM  
Blogger Bruce said...

Since Sweden has both a trade and a budget surplus, it would seem that the fundamental would argue for a stronger Krona.

Is this move in the Krona mainly because of over leveraged holders selling everything?

4:37 PM  

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