Never Bet On A Higher Swedish Krona

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Includes: FXS, SEKS
by: Alexander Johansson
Summary

Why it makes perfect sense for the Swedish National Bank to lower the SEK.

There is little downside of a low currency for Sweden.

Why politicians and economists cheer when the SEK goes down.

Riksbanken or The Swedish National Bank's sole aim is to make sure inflation stays at a level around 2%. Not until 2018 did the inflation reach this target, before it was considerably lower and even been negative.

Unlike the Fed, the mission for Riksbanken is not to keep the economy stable or prevent booms and busts; that was given to another government agency called "Finansinspektionen" something similar to the SEC.

About Sweden and the Krona (SEK)

Sweden is a small North European country with high taxes and an export-driven economy. Denmark, Germany and Norway are its largest trade partners, but exports a lot of high-end products to the European Union.

The Krona is an independent currency unpegged against other currencies unlike the Danish krona which is pegged against the Euro. This gives Riksbanken lots of room to maneuver in and when in need make sure the SEK won't gain too much against major currencies like the Dollar and the Euro.

It's the exports stupid

This may soon be a phrase uttered by Swedish politicians, but so far seem to be unaware of the fact that exports are what drive the Swedish economy and make sure they are reelected.

When a country is a net exporter of goods and in Sweden's case a much larger exporter than importer, there is very little gain for central bankers to strengthen the currency. Even more so when inflation isn't picking up at the rate they want it to be.

See, if your currency becomes stronger (valued higher), the goods your exporting companies sell become more expensive to other nations or force the exporters to cut prices which causes profits to quickly evaporate. If exporting companies chose to or are forced to cut prices instead of being able to raise prices as much as the local currency is rising, then they must look elsewhere to cut costs; there may be layoffs of staff or less investment in future projects or less goods bought from other firms.

People getting laid off are much less likely to spend and consume new goods. When a few companies all start to invest less of their money in new projects or buy less goods from other firms, it quickly spreads throughout the economy.

The unknowing mob

When your currency falls in value, the average person is not likely to notice other than that all of a sudden some goods start to become more expansive and others do not. As it happens, it is the imported goods that became more expensive and the locally produced that stayed flat.

Consumers are therefore more likely to buy the local food or goods that didn't "increase" its price causing the importers trouble and benefitting the local producers.

Everyone is happy

Exporting companies are happy to see a lower currency since they will be able to either lower their prices to take market share or they just keep their prices the same and see their profits and margins soar higher (in their local currency).

Bankers are happy because now loans and real estate becomes cheaper in the local currency and will likely attract some foreign capital investments while at the same time keeping more capital at home, since prices abroad increase overnight for the businessman looking to invest in another country.

Politicians are happy since local producers are benefitted and more likely to employ more people and make more money and pay more taxes. Exporting companies will follow the same pattern of employing more staff and pay more taxes because of higher profits.

Local tourism is happy because foreign tourists now get a discount while travelling to them and its citizens are more likely to spend their vacation in the country because it is cheaper or too expensive to travel abroad.

Everyone is happy, well, almost everyone

Importers are not happy at all since their goods now became more expensive overnight and they are forced to "increase" prices in the local currency or sell the goods cheaper than before.

Tourists or people travelling abroad a lot are not happy when their travel costs increase in price and the currency they get paid in loses value compared to other currencies.

The ones least happy are countries who trade a lot with the currency manipulator because their company's goods become more expensive and less competitive compared to the other country's goods. In short, all of the above happens in reverse for the trading partners from the other country.

There is one more factor that could potentially be a big problem for a country looking to "micro" devalue its currency and that is skilled workers. If you have a lack of skilled workers or just in general a low percentage of unemployment, it could be a disaster to lower your currency as workers will travel to neighboring countries and get paid a higher salary there. In Europe, this happens mostly in countries who can understand each others' language and culture. It won't happen between, for example France and Germany, but in the Nordic region, we are experiencing lots of skilled workers such as nurses and doctors moving from Sweden to Denmark or Norway and get paid a much higher salary due to the stronger currencies in those countries.

But since Sweden has a much higher level of unemployment, 6.8% compared to Denmark less than 5% and Norway less than 4.5%, the problem is not severe except for a few areas such as healthcare.

Struggling to increase inflation

Riksbanken has long struggled to increase inflation and inflation expectations. Because of the high unemployment and the many government-focused contributions to educate low-educated citizens, there is little pressure to increase salaries.

Because of the crisis in 2008, interest rates got slashed and even turned negative and has since stayed negative 0.5%; there is little to no inflation increase coming from interest payments. If they were to increase their interest, they would simply cause all lenders to pay much more for their loans and since that is an important metric in the inflation-adjusted calculations, it would really impact inflation positively. But Riksbanken is stuck; they have recently managed to increase the rate from -0.5% to -0.25%, the first increase since early 2009.

Interest rates Sweden from https://www.riksbank.se/sv/statistik/sok-rantor--valutakurser/reporanta-in--och-utlaningsranta/

Sweden may already be in a recession with a shrinking economy and low expectations on inflation to increase; they will have trouble increasing the interest rate to even 0%.

Imagine someone in 2006 would tell you that central bankers would struggle to get the interest rate back up from negative to 0%; you would think that person insane. I would.

Because of the independent Krona back in 2008-2009 during the great recession, all Sweden needed to do was to make sure the Krona went down more than the currencies Sweden exported to, and of course Riksbanken did just that, after a while at least. With one simple stroke, it made Swedish companies more competitive against foreign companies and made sure to "export" some of its problems onto other countries, mainly in the Euro region with Euro as currency.

All is good, isn't it?

Now, all problems were solved, Sweden was cheered as one of the few countries getting out of the recession fastest and with some of the highest growth rate in GDP afterwards. Only one tiny problem (tiny at first) lending, mainly house lending continued upwards, faster and faster fueled by lower interest rates.

More houses and apartments are being and have been built the last years since the 1960s, loans were cheap and lots of immigrant asylum seekers who needed housing made perfect sense for construction companies to build as much as possible.

Now Swedish households are one of the largest mortgage lenders in the whole world. Apartment prices in Stockholm reached over 11,000 dollars per square meter on average in many areas. And pretty much every city in Sweden has or had lack of housing while at the same time seeing prices go up to levels never seen before.

Here comes the problem. How do you make sure inflation stays as high as you want it while at the same time increase interest rates for highly leveraged households?

Increasing interest rate cuts directly at households' wallets and will force them to spend more to pay loans instead of putting the money to better use in the rest of the economy. So that's not possible without a booming economy and with a recession on the horizon (or already here) and a new government (to the left) intent on raising taxes and building railroads instead of helping the economy, there is no relief to be found.

Immigration

I hate to say this about immigration, but for the sake of facts it must be made.

Sweden has taken more immigrants from Syria and Afghanistan than any other country in Europe compared to its own population. Rules somewhat hardened lately, but roughly a million people will be able to take their families with them after they have gotten a resident permit. Sweden's board of immigration says it may be as high as one million more people coming until 2025. That is about roughly two million asylum immigrants in a country with a population of nine million before the Middle East asylum crisis started.

In general, it takes seven years for an immigrant to get a job. Seven years of housing, schooling, education, food etc., to be paid for by municipalities in Sweden.

Costly, since the whole working population is only about five million people today, adding to that an aging population who all should get paid medical expenses and care paid for and I hope you can imagine what is going to happen with income taxes in the future (already the highest in the developed world by the way).

The only options left

The Riksbanken's only goal and measure of performance is to keep inflation at 2%. Raising interest rates with only a little could crush the already fragile economy. Not only would it cause households to pay higher interest expenses, but it would naturally push the Krona upwards. Which is very bad for an export-driven economy on steroids with an artificially low local currency and negative interest rate.

Option 1.

If inflation picks up and remains stable over 2%, they will gladly increase interest rates and let the rest of the economy take care of the problem.

They have stated and even threatened many times over that a normal interest level would be between 2.5%-4%.

This would temporarily push the SEK up, but only for a little while as investors and traders soon would figure out just how bad that would be for a highly leveraged, export-driven economy.

Option 2.

Inflation does not pick up or falls. This would trigger Riskbanken to lower interest rates once again and perhaps to even lower levels than -0.5%. They have even stated that they have more options than just the interest rate. I wonder though just what that is since they haven't provided any details. Perhaps Sweden will be the first industrialized nation to try helicopter money (a term for printing cash and handing it out to the people).

This will of course also decrease the value of the SEK against other currencies, perhaps even by a lot. Even if we take the helicopter thesis out of the picture.

Summary

Do not bet on a stronger Swedish currency (SEK); there is little to no incentive for the National bank nor the politicians to want a stronger Krona.

The Riksbanken got no good options; it is balancing on the edge of a knife.

Raising interest rates would lead to:

  • A stronger SEK which means struggling exporting companies that play a large part in the Swedish economy.
  • Higher loan costs for housing developers and households who both hold historically very high levels of debt. It would cause unforeseen consequences.
  • Lower inflation and lower inflation expectations and since they have been struggling since the great recession to get inflation to where they want it they can't risk letting it fall again.

Most likely inflation will fall anyway and they are forced to lower interest rates; this will be the least hurtful as it will lower the SEK, making export companies thrive and households pay less interest costs.

I see no strong uptrend for the SEK in the future, only minor upwards swings due to short-term positive news.

The purpose of this article is to warn investors to bet long on the SEK. Shorting makes much more sense.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I hold SEK because I am forced to, by being a Swedish citizen and need it to pay for housing, food etc.