Why The SEK Is So Weak
Why has it lost so much value? There are 4 reasons:
-Sweden is a relatively small currency zone, meaning its asset markets are relatively illiquid. In a time when liquidity preference among investors increases, this causes the SEK to lose in value.
-Another reason is for the weak SEK is worries about the potential losses of Swedish banks in Eastern European countries in general and the Baltic countries in particular. Assuming they practice honest accounting, their losses so far has been relatively modest, but the losses will almost certainly grow. Just how much it will grow is uncertain-but the uncertainty is in itself something which makes investors shun the SEK.
-Sweden's export industries have a disproportionate exposure towards the crisis struck Baltic countries and cyclical industries like cars and wood products. As a result, the Swedish trade surplus has been falling in recent months despite the weak SEK.
-The Swedish Riksbank has made a 180 degree reversal in monetary policy. Until recently, it appeared as one of the greatest inflation hawks among world central banks, raising interest rates as late as in September last year to 4.75%. But starting in October, it reversed course completely and implemented radical interest rates cuts of 3.75 percentage points in just 4 months, with interest rates now being 1%. Given the extremely weak Swedish GDP number for the fourth quarter of 2008, expectations are now growing that the Riksbank will join the central banks of Japan, Switzerland and America and implement ZIRP, Zero Interest Rate Policy.
What will happen to the SEK now? Well, while it is possible that the SEK could fall further in the short-term because of the above mentioned factors, we are most likely close to its low for this cycle. A Swedish ZIRP is increasingly priced in, so that factor can not depress the SEK much more. The Baltic crisis will remain a worry, but the uncertainty about that too is probably mostly priced in. In the medium- to long-term, the SEK looks very attractive.