SEK market positioning neutral; sell option vol, reveals SEB client survey

The Swedish bank’s report also suggests that the best strategy to profit from it is to sell option volatility. Over the medium term, the bank has a positive outlook for what it considers to be an undervalued currency and forecasts it to appreciate against G4 currencies based on the strong fundamentals.

While the krona is still vulnerable to slower global growth, particularly in Europe, given its highly export driven economy, the currency benefits from Sweden’s strong twin surpluses and low debt/GDP ratio. Sweden therefore enjoys positive external balances in an environment of heightened uncertainty and increased risk premiums – “a very reassuring situation for the krona”, says Carl Hammer, head of FX research at SEB.

The survey also indicated that the major SEK trading institutions positioning was currently defined as neutral, limiting expected EURSEK moves in coming months. Therefore, the strongest trading recommendation implied by the results is to sell EURSEK option volatility.

Although implied volatility in EURSEK has declined substantially, from 22-month highs of 12.62% in September to around 10.00%, SEB expects vols to decline further still and recommends trades such as six-month double no-touches at 8.65 versus 9.70 for a cost of about 27% of notional pay-out. Whilst analysts expect a prolonged period of range-trading, consistent with the survey’s conclusions, analysts still recommend investors selling EURSEK on rallies towards 9.30/50 rather than buying on dips, reflecting their positive outlook for the Swedish krona going into 2012.

Despite the SEK weakening by around 4% to 5% between the second and third quarters of this year, after reaching a 14-year high earlier this year, Hammer says the SEK, which has historically been a highly risk-sensitive currency, has remained relatively strong amid fears of a global slowdown and the intensification of the eurozone debt crisis.

“On a trade-weighted basis, krona is still attached to risk appetite but our analysis shows krona is in fact re-adjusting as less procyclical and a more defensive currency,” says Hammer.“Our EURSEK regression, used since 2008, has shown signs of losing its predictive ability, with the krona remaining resilient despite large falls in PMI data.”

Separately, SEB’s quarterly survey of Swedish exporters also confirms that FX hedge ratios and FX durations have been steadily reduced since the financial crisis in 2008. This means lower currency sensitivity to a decrease in Swedish export orders, as is expected in a weak economic environment. Whilst SEB rejects the view that SEK is a safe haven currency due to its lack of liquidity, it says the currency will continue to attract diversification flows. Global reserve managers, keen to diversify their holdings away from euros, have also shown appetite for Swedish assets – a trend that will see more sustained flows into SEK.