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SEK: The FX World's Lesser-Known Safe Haven

SEK: The FX World's Lesser-Known Safe Haven

2014-01-10 17:00:00
Joshua Brown, Head Forex Trading Instructor
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Talking Points:

  • The World's Most-Traded Currencies
  • Why SEK Maintains Stability in Volatile Times
  • Negative Factors Keeping Some Traders Away

Taking a broad look at the global foreign exchange market, it’s easy to understand why some of the world's most important currencies were also the most highly traded in 2013 (see below).

Guest Commentary: The Most Heavily Traded Currencies in 2013

  1. US dollar (USD) - 87% (share of total FX volume)
  2. Euro (EUR) - 33.4%
  3. Japanese yen (JPY) - 23%
  4. British pound (GBP) - 11.8%
  5. Australian dollar (AUD) - 8.6%
  6. Swiss franc (CHF) - 5.2%
  7. Canadian dollar (CAD) - 4.6%
  8. Mexican peso (MXN) - 2.5%
  9. Chinese yuan (CNY) - 2.2%
  10. New Zealand dollar (NZD) - 2%
  11. Swedish krona (SEK) - 1.8%

Source: Wikipedia Template (Total share exceeds 100% because currencies trade in pairs)

The four most-traded currencies represent some of the largest economies in the world and perennially top this list. From there, the commodity dollars of the Asia-Pacific region (AUD and NZD) are tradable shortly after the US closing bell, and their host nations export much of the world's raw materials.

Switzerland has a large financial services industry, and its very stable currency is seen as a safe haven. China's currency is (understandably) a by-product of the nation’s growth, and Canada possesses a strong, commodity-driven economy as well.

Mexico's GDP is now the world’s 14th largest, and its proximity to the US certainly helps spur continuous growth, with roughly 90% of Mexico’s exports destined for its neighbor to the north.

Perhaps surprising to many, however, is that the world’s 11th most-traded currency is the Swedish krona (SEK), which holds a 1.8% share of total FX volume. In fact, for many years and up until 2012, SEK ranked 8th or 9th on this list.

Its popularity, however, does not seem to match the size of Sweden’s economy. Despite being Scandinavia's largest economy, Sweden ranks 34th in the world according to purchasing power parity and 22nd according to nominal GDP. Therefore, SEK’s high FX volume is not an affirmation of any unique or strong economic attribute, at least not outwardly.

When Sweden agreed to take part in the Scandinavian Monetary Union in 1873, it established a new national currency that was pegged to gold in order to ensure monetary stability. Though the union disbanded in 1914 due to the outbreak of World War 1, Sweden decided to keep the krona, but dumped the peg to gold. Decades later, in 1992, the Swedish central bank allowed the krona to float freely, having previously been tied to the European Currency Unit (ECU).

In recent years, there has been deliberation as to whether Sweden should adopt the euro. Under the Treaty of Maastricht, it is obliged to do so at some point in the future, however, the Swedish general population has objected due to fears of losing control over monetary policy.

The recent and ongoing debt crises in the Eurozone and elsewhere in the world have certainly not made this prospect any more appealing, and shaken confidence has led many Swedes to believe that they have actually gained by staying out.

USDSEK has been rather stable for the last couple of years, fluctuating largely between approximate levels of 6.00 and 7.30. Despite a period of economic weakness in 2008-2009 due to the global financial crisis and Sweden’s natural exposure to Eurozone debt, the Swedish economy has sustained a constant growth rate and emerged largely unscathed and with low inflation.

Sweden's budget balance is considered to be acceptable, and the nation maintains a large current account surplus. The county reports practical public debt at roughly 38% and maintains a AAA credit rating by all major ratings agencies. These positive factors have certainly underscored the value of holding a risk-off krona since 2008.

Guest Commentary: USD/SEK Stays Stable Despite Volatile Times

SEK_The_FX_Worlds_Lesser-Known_Safe_Haven_body_GuestCommentary_JoshBrown_January10A.png, SEK: The FX World's Lesser-Known Safe Haven

Historically, the Swedish krona has packed a lot of relative FX punch in terms of turnover relative to the nation’s economic size because it was seen as a smaller version of Germany since many multinational companies have headquarters there. Its commodity exports have also been robust for many years. As a result of such factors, SEK’s relative safety and reliability caused it to be considered a safe haven, second only to CHF, amidst the heightened EUR volatility post-2008.

See also: Short USD/SEK Near Key Resistance Level

While currencies of rapidly developing nations such as Mexico and China are becoming some of the world's most actively traded, volume in well-established currencies like CAD, CHF, and specifically SEK, is stagnating. Bloomberg reported this was due to Sweden's state-backed export bank buying emerging-market currencies to assist local companies in building markets outside of Europe.

In addition, Swedish investors bought foreign currency to take advantage of high investment returns in those nations.

A relatively high spread may also keep currency traders away, particularly since SEK is highly correlated to the low-spread EUR. However, despite recent weakness and declining trade volume, SEK remains a resilient currency and a viable safe haven that trades with stability and somewhat independently of EUR uncertainties.

Generally, Sweden boasts a sound economy, and SEK will find favor once again among FX traders, especially if emerging-market growth should stabilize.

By Joshua Brown, Guest Contributor, DailyFX.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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