No Easy Sell for Traders Trapped in Scandanavia

Foreign-exchange traders becalmed by central-bank largesse are finding that even currencies from Group of 10 nations are about as hard to escape as emerging markets once volatility rises.

Norway's krone is the biggest loser among 31 currencies tracked by Bloomberg since June 18, the day before the Federal Reserve signaled it may reduce its stimulus measures this year, falling 5.8 percent against the dollar and 3.2 percent versus the euro. Sweden's krona posted the second-biggest drop. The declines exceeded those of the Polish zloty and Indian rupee.

As two of the three least-traded G-10 developed-nation currencies based on the latest triennial survey by the Bank for International Settlements, the krone and krona trapped investors while the Fed roiled markets worldwide. As long as central banks were tamping down volatility by providing unprecedented stimulus, traders were confident to take ever bigger risks by wading into hard-to-trade currencies.

“In relatively low-liquidity currencies, such as the Scandinavians, you get these big moves when all the investors want to rush through the same exit door,” Thomas Kressin, the Munich-based head of European foreign exchange at Pacific Investment Management Co., which oversees about $2 trillion, said in a June 24 phone interview.

Traders who use debt to amplify returns in the krone and krona likely exacerbated the declines by being forced to sell to meet margin calls, Kressin said.

The two Nordic currencies accounted for just 3.5 percent of the $4 trillion of average daily turnover in foreign-exchange markets in the three years to 2010, the Basel, Switzerland-based BIS said. The krone was little changed at 6.0890 to the dollar as of 9:19 a.m. in New York, while the krona traded at 6.7026.

“Liquidity is very shallow in the Scandies,” Lee Oliver, a London-based director at Citigroup Inc., wrote in the second-largest currency trader's FXWire client note on June 24.

Scandinavian midsummer public holidays meant many local traders and investors were absent from their desks at the end of last week, compounding the lack of liquidity, according to Richard Falkenhall, a strategist at SEB AB in Stockholm.

Exiting Trades

“This is a move related to foreign investors” exiting trades, Falkenhall said in a June 24 phone interview. “Probably there were more longs in these trades than we thought,” he said, referring to bets an asset will rise.

Fed Chairman Ben S. Bernanke said last week the central bank may pare its unprecedented bond-buying program this year and end it in mid-2014 if the economy improves in line with its expectations. His comments after the Fed's June policy meeting sparked a selloff in relatively high-risk assets on speculation there will be less cash circulating in the global economy.

Norway's krone slipped to 6.1737 per dollar, the weakest level since December 2010, and a 2-1/2-year low of 8.0819 per euro on June 24, before rebounding the most in more than a week yesterday. The Swedish krona dropped to a seven-month low of 6.8018 per dollar and a one-year low of 8.8990 versus the euro, before rising for the first time in four days yesterday.

Sweden's currency will end the year at 6.69 per dollar and 8.46 versus the euro, while Norway's krone will be at 5.92 and 7.45, according to median estimates of analysts surveyed by Bloomberg News.

Rising Volatility

The JPMorgan Global FX Volatility Index, which measures price swings in currencies, rose as high as 11.96 this week from a more than five-year low 7.05 in December.

The lack of liquidity also pushed up price swings in the Nordic currencies. Three-month volatility in the Norwegian krone versus the dollar jumped 33 percent in the past week, and swings in Sweden's krona rose 11 percent, Bloomberg data show.

The currencies have been weakening since about the end of the first quarter, even as Sweden defies the recession in the euro region and Norway benefits from oil revenues that bolstered its $730 billion sovereign wealth fund, the world's largest.

Swedish Finance Minister Anders Borg said that he welcomes a weaker exchange rate.

“I don't mind the krona weakening a little bit when we see problems in the world economy,” Borg said yesterday in a phone interview with Bloomberg Television's Francine Lacqua and Guy Johnson. “We don't have a strong krona policy. We believe that the market should set the rate.”

Prime Minister Fredrik Reinfeldt echoed that sentiment, saying yesterday said the krona's recent slump has brought relief to exporters after the government ruled out tampering with the exchange rate.

Sweden's Riksbank has refrained from lowering interest rates, which tend to reduce the appeal of a currency, at its last two policy meetings. Gross domestic product increased 0.6 percent in the first quarter, up from 0.1 percent in the previous three months and compared with a 0.3 percent estimate in a Bloomberg News survey.

Norway will grow 2.4 percent this year and 3 percent in 2014, Statistics Norway forecast on May 30. Its central bank, Norges Bank, has kept inflation below its 2.5 percent target since mid-2009, even as it signaled it may lower its deposit rate from 1.5 percent. That's putting pressure on the krone.

“We are dealing here with fundamentally sound currencies,” said Pimco's Kressin. “Once the positions are washed out, investors will have opportunities to buy these currencies at really attractive levels. For long-term investors, this is a great opportunity.”

No Target

Norges Bank Governor Oeystein Olsen said June 21 he has no specific target for the krone even as he acknowledged policy makers were aware they would trigger a slump by lowering the outlook for borrowing costs.

Bilal Hafeez, the head of global foreign-exchange strategy at Deutsche Bank AG, the biggest currency trader, said the German lender's data show a build-up of positions in Nordic currencies that still need to be unwound.

“Some of the largest positioning going into the Fed was in the Scandinavian currencies,” Hafeez said in a phone interview on June 24. “The market is exhibiting a lot of risk-aversion and position unwinds. Unless we get stabilization in that, or a shift in the domestic story within Scandinavia, I don't think one should try to fade these moves.”

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