Traders' views - Forex

How to trade the Nordic currencies

By , 03 Oct 2012

Currencies such as the Swedish Krona (SEK) or Norwegian Krona (NOK) are often forgotten about by day traders whilst the US dollar, euro and GB pound hog the spotlight. However spreads and volatility of trading these Nordic currencies against the more popular currencies can present good opportunities. 

Here easy-forex provides some useful information on the characteristics of SEK and NOK to get you started.

Trading the Swedish Krona (SEK)

SEK has been Sweden's currency since 1873. To investors it is famous as a 'risk-on' currency which means it tends to get stronger when global equity markets raise and to weaken during times of risk aversion.

Price triggers:

  • It is strongly dependant on the Global and EU economy , especially Germany, any continued slow down or strong recovery of the global economy can impact Sweden's exports. The trade balance announcement can be used to monitor export and import activity, where a trade surplus (monetary value of exports are higher than imports) is positive for the economy. 
  • Sweden's central bank, Riksbank, control the repo rate. Changes in this rate affect pricing of SEK. The currency tends to strengthen when the difference between its interest rate and USD interest rate widens.
  • Historically there is a strong positive correlation between SEK and the S&P 500 which confirms its sensibility to the global equity market and that it is a risk loving currency. For example, since June 2012 the S&P has advanced 17% in the same period SEK has gained 11% against the USD and the EUR.
  • Being a risk-on currency SEK also follows oil prices. From June 2012 the price of crude oil has risen 30% at its high and SEK value has also increased across the board.

Risk factors:

  • At illiquid times the currency can be very volatile. This characteristic should be factored in when assessing your level of risk.
  • When the EU economy slows there is less demand for Swedish goods hence a decrease in exports. A large appreciation of SEK can also penalise exports.
  • Swedish exports have high price elasticity, meaning a change in the demand can cause a large change in the price of goods. This makes for a more volatile environment.
  • The Riksbank may intervene at times to halt currency strength.

Trading the Norwegian Krona (NOK)

Norway’s oil and gas sector represent about 25% of the overall economy and more than 50% of its total exports. They have strong trade partners mainly with the core Euro zone countries in the north. The central bank, Norges Bank, have a disciplined monetary policy and the overall economy has a strong current account balance and strong public finances.

Price triggers:

  • Norges Bank interest rate decision affects currency valuation, a higher interest rate would be positive for the NOK.
  • The inflation rate target is 2.5% year-on-year hence a deviation away may be an indication that the Norges bank will act and change interest rates; this forecast is reflected in currency pricing.
  • The other major local fundamental indicators are GDP and debt figures.
  • Lower interest rates in Europe and the US may widen interest rate differentials with the NOK and this could lead to appreciation of the currency.
  • The announcement of additional QE from the US Federal bank last month contributed to the fall in USD/NOK as the NOK has strengthened.
  • Historically there are positive correlations between NOK and the price of oil and the price of gas.

Risk factors:

  • Low liquidity make the currency volatile
  • Currently there is the possibility of a housing bubble collapse which could transfer into a bank risk and later impact the whole economy.
  • If NOK is too strong then exports are penalised. Due to the high reliance on exports the central bank may intervene to prevent the currency from getting too strong.
  • It is difficult for the central bank to fight against rising house prices and a strong currency at the same time, because by increasing interest rates to cool down the housing market, the NOK is likely to appreciate.
  • Low global growth and a drop in commodity prices could have a negative effect on NOK.

Risk warning: Forex commodities and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. The information provided is for informative purposes only, and can under no circumstances be considered as a recommendation to engage in any trade.  Easy Forex Trading Ltd is regulated by the Cyprus Securities and Exchange commission (CySEC), License Number 079/07.

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