Nordic FX: volatility ahead?

Magne Østnor

Managing different currencies adds some complexity to operations spanning the four largest Nordic economies, which are similar in business, legal and sociopolitical aspects. However, foreign exchange (FX) risk is lessened due to Finland’s use of the euro and the Danish krone’s close peg to the common currency.

The Danish currency keeps within an exchange rate band agreed by the country’s central bank, Danmarks Nationalbank, and the European Central Bank (ECB), and is the cornerstone of the country’s economic policy. “The central bank keeps a tight rein on the krone and will intervene if it gets too strong or weak,” says Jørn Sodborg, director, head of e-business and distribution at Jyske Bank.

He adds: “After the Swiss National Bank unpegged the franc in January 2015, speculators thought the Danish krone would follow. But the Nationalbank acted aggressively in the market to defend the currency, which won it well-deserved credibility.” Thus, speculators are not active in the Danish currency market; instead, activity is mainly linked to mergers and acquisitions and hedging by pension funds, asset managers and corporates.

Nokkie and stocky

The Norwegian krone, or ‘nokkie’, and the Swedish krona, or ‘stocky’, are the liveliest of the Nordic currencies. Today, they are both on the weak side compared with the euro, according to Richard Falkenhäll, senior FX strategist at SEB. Sveriges Riksbank moved to weaken the stocky to support Sweden’s export-driven economy, whereas the nokkie weakened due to plunging oil prices in 2014. Notwithstanding some volatility, Mr Falkenhäll reports that ‘real money’ investors – such as pension funds and asset managers – commonly do not hedge, and operate with an open FX exposure.

Before the global financial crisis, it was usual to see long hedges in stocky, he says, as exporters hedged future revenues. “But during the crisis their order books disappeared and they ended up being over-hedged, which was costly. Since then, domestic companies now hedge less and for shorter time periods than historically,” says Mr Falkenhäll.

Magne Østnor, FX strategist at Norwegian investment bank DNB Markets, says real money investors, with a three- to five-year horizon, may use FX forwards and options, but concurs that many long-term investors do not typically hedge FX risk. “A commonly held view is that, at current levels, an investor isn’t doing that much wrong if they decide not to hedge,” he says.

Real estate company Samhällsbyggnadsbolaget (SBB) de-risks its business by holding assets in the four countries of operation. “While these countries have many things in common, they are four different FX exposures, with economies in different cycles,” says SBB chief executive Ilija Batljan.

SBB does not use hedging instruments but matches assets with financing in the same currency, termed natural hedging. “When we buy assets in Norwegian krone, then we do our debt financing in Norwegian krone; when we buy assets in euro, we do the same,” says Mr Batljan.

Potential risks

While the euro has normalised, with a relatively long-term neutral position against the US dollar, more broadly there are signs of deceleration in the EU, says John Hardy, head of FX strategy at Copenhagen-based Saxo Bank. “And if a global trade confrontation erupts, the eurozone is poorly positioned as a large exporting bloc. Suddenly, some of the shine has come off of the euro,” he adds.

Similarly, the stocky is vulnerable to global trade swings due to Sweden’s export-based economy. “If global growth gets back on track then it may recover – but we aren’t expecting inflation to come back in any notable way,” says Mr Hardy.

The nokkie is better placed, with Norway’s oil fund helping to power through the credit cycle. “But the economy has similar structural vulnerabilities as Sweden, such as a housing bubble of almost equal size relative to the economy,” says Mr Hardy. Notably, Norges Bank, the Norwegian central bank, has signalled an interest rate rise in September, ahead of the Riksbank and the ECB, which may help strengthen the currency.