Picture: 123RF/SOLAR SEVEN
Picture: 123RF/SOLAR SEVEN

London/Stockholm — It’s been a decade of disappointment for currency traders and nowhere has that been more evident than Sweden.

Banks have been wrong for most of the past 10 years with their krona predictions as Sweden’s economy, often seen as a barometer for global trade, found itself battered by recessionary fears and tariff wars. The forecasters’ graveyard has led analysts to question the central bank’s credibility, left policy makers fuming about economic data and triggered a collapse in trading volumes.

It’s a microcosm for the global currency market over the past decade. While overall turnover has picked up worldwide, foreign-exchange managers have lost money for seven of the 10 years since the end of 2009 and some of the biggest funds have been forced to shut down. Market shocks such as the removal of the Swiss franc’s currency cap and the devaluation of the Chinese yuan have only complicated matters further. And shifts in central bank policy have also caught traders unawares and left them nursing losses.

“You don’t know if the Riksbank cares about the krona or if it doesn’t care about the krona, so it is extremely hard to read,” said Ludovic Colin, head of global flexible investment at Vontobel Asset Management, which doesn’t have any exposure to Sweden. “Their policy is very confusing and it doesn’t match fundamentals, so it is extremely hard for long-term, macro guys to understand what they are doing.”

The mood surrounding Sweden’s currency is reflected in dwindling trading. The average daily volume in the euro-krona pair between January and October was €4.5bn this year, compared to €19.4bn over the same period in 2018, according to Depository Trust & Clearing Corporation data.

Strategists around the world have been exiting the currency markets, looking for more promising opportunities in the emerging fintech sector

Globally, forex managers have posted cumulatively negative returns since 2011, based on the Citi Parker global currency manager index. That has seen currency-only hedge funds, once a hot part of financial markets, retreat in numbers after nearly tripling in the years before the global financial crisis. Traders are suffering from volatility sliding to near-record lows, based on the JPMorgan’s global forex volatility index.

The krona shows the challenge of getting it right. Banks have, on average, only correctly predicted the currency’s direction three times in the past decade. For 2020, analysts see the krona flatlining to 10.50 to the euro by year-end, according to the median in a Bloomberg survey.

The Swedish currency touched its weakest level in more than a decade in October, though has since recovered some ground to trade around 10.53 to the euro. It remains nearly 4% down in 2019, compared to forecasts for a rally of nearly 4%. Against the dollar, it has lost almost 8%, the worst among major currencies other than Brazil’s real.

Not everyone is negative. Buying into the krona’s recent rebound is among the top trades for 2020 for Morgan Stanley, seeing 10.30 by mid-2020, while Goldman Sachs is also targeting that level. The Riksbank’s desire to lift interest rates out of negative territory in December and likely subsequent reluctance to cut them even if data deteriorates further will boost the undervalued krona, Goldman strategists said.

“We have seen in earlier years how such recommendations have ultimately proved to be a deathblow to the long krona trade,” Andreas Steno Larsen, a global currency strategist at Nordea Bank, said of bullish krona calls. Such trades “have worked as contrarian indicators for years”.

These mildly bullish calls also hinge on a global economic recovery and a resolution to ongoing trade disputes — both far from certain. The dollar itself, which accounts for nearly nine out of every 10 currency trades, was expected to lose steam in 2019 while the euro was seen rallying. Both have defied predictions as geopolitics intervened.

Strategists around the world have been exiting the currency markets, looking for more promising opportunities in the emerging fintech sector, while market-rigging scandals have tarnished the industry this decade and ended careers for some.

In the latest blow to the industry, Morgan Stanley has fired or placed on leave at least four traders, as it investigates whether an alleged mismarking of currency trades helped conceal a loss of $100m to $140m, according to people with knowledge of the matter who asked not to be identified as the matter is private.

Policy challenge

Predicting central bank policy has proved a problem. The US Federal Reserve cut interest rates this year after hiking in 2018, while the European Central Bank (ECB) aimed to lift stimulus but instead found itself adding more. While Swedish growth data released on Friday was enough to reinforce the view of a Riksbank rate hike in December, the market is signaling that policy makers won’t be able to exit crisis-era rate levels any time soon.

“Data has been very weak but, strangely, the central bank has been hawkish relative to the fundamentals,” said Kacper Brzezniak, a portfolio manager at Allianz Global Investors, which oversees €543bn in assets. “For that reason we do think the krona could weaken even further,” he said, adding he has been betting on the krona’s slide for the past month and is targeting 11 to the euro.

Since 2013, the krona has lost nearly 20% against the euro, and traders in options markets are betting that trend will persist for the next three years. The challenges of trading the currency are plain to see, with Nordea, Danske Bank and Handelsbanken — among the largest banks in the Nordic region — going the other way to Goldman and Morgan Stanley by predicting the krona will struggle in 2020.

“We see no fundamental reason to price in more hikes for years to come,” Danske’s Stockholm-based Stefan Mellin wrote in a client note. “Instead, weaker Swedish growth, coupled with far too low inflation, makes it more likely that the next move, post-December, will be a cut rather than a hike: a headwind for the krona.”


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