Where’s the value in FX?

Today it looks to me like we are hitting a turning point in SEK.

I like the SEK because

1) It’s cheap – the cheapest since 2008 against GBP and the USD and in real terms the cheapest since 2002 against the USD.

2) There’s not much wrong with the economy. Sure, growth’s been a bit weak and unemployment’s a bit higher than they would like, but the budget deficit is just 1.3% of GDP and there is a current account surplus of 5% of GDP. Economically, it looks very similar to Germany, and can be expected to benefit going forward like other industrial exporters from the decline in the oil price.

3) Given that the world seems to want to buy the Swiss franc as a pseudo-deutschmark, why is the SEK so weak compared to the CHF? The fundamentals are similar.

4) Today’s move to negative rates and instigation of a QE program looks to me to be a gesture to low inflation rather than anything that will  have any practical effects, and has been done entirely because of low inflation rather than weak growth. In any case, that is all they will do for the foreseeable future, so further monetary policy risks look minimal.

5) We are hitting some good technical targets in USD/SEK and GBP/SEK, and have had an 11 month run of higher highs in USD/SEK which looks unjustified by the news. Of course, the US economy is currently stronger but a lot of good news has been priced in with the 35%(!) rise in USD/SEK in the last year

There are of course still risks in being long SEK. If the Eurozone picture deteriorates significantly again USD/SEK is likely to move with EUR/USD, while a better Eurozone outcome may push the SEK lower against the EUR in the short run. But the downside now looks a lot more limited with a huge amount of bad news already in the price. In terms of risk/reward, GBP/SEK may be the best sell given the UK election risks. Look for GBP/SEK to be back below 12 by mid year. The 2009 high at 13.23 should be a good stop.

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One thought on “Where’s the value in FX?

  1. Pingback: Where’s the value in FX? | fxvalueman

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