Forex Trader’s Guide to the Swedish Krona
The currency of Sweden is known as the Krona, and it has been the country’s legal tender since 1873. Represented by the Forex code SEK, the sign “kr” is commonly used, either preceding or following the value. The word Krona translates into English as “crown”, and so the currency is sometimes referred to as the Swedish Crown. Each Krona is divided into 100 öre, although the öre coin was discontinued in 2010. Although Sweden is part of the EU, it have not yet adopted the Euro as its official currency, although the 1995 accession treaty states that the country must join the Eurozone once the convergence criteria have been met. Support for this course of action among the Swedish general public is low, and thus far, the Swedish government have managed to put off adopting the Euro by not joining the ERM II (the exchange rate mechanism) as a 2-year membership is required before joining the Eurozone. The central bank of Sweden, known as the Riksbanken or Sveriges Riksbank, is the oldest central bank in the world, and the third oldest still to be operating. This body is responsible for deciding on the country’s monetary policies, which are instrumental in determining the value of the Swedish Krona.
Historical Facts Behind the Swedish Krona
The Swedish Krona replaced the country’s old currency, the Riksdaler. It was introduced as a result of the Scandinavian Monetary Union, which was established in 1873 and continued until the First World War. This union comprised Sweden, Norway and Denmark, all of which used a currency with a similar name, being known as the Krona in Sweden and the Krone in Norway and Denmark. All three currencies adhered to the gold standard. In 1914, the Scandinavian Monetary Union was dissolved, but each of the three countries involved chose to keep the name of their own respective currency, although they remain separate currencies to this day. Historically, the Swedish Krona’s exchange rate has been dependent on Sweden’s monetary policy, and a managed float has been upheld since 1992.
Sweden has an export-oriented and developed economy which is largely supported by iron ore, timber and hydropower. These form the resource base of the nation’s economy, which is geared towards foreign trade. Sweden’s primary industries include telecommunications, pharmaceuticals, motor vehicles, industrial machinery, chemical goods, appliances, steel, iron, forestry and precision equipment. While the agricultural sector used to employ much of the domestic workforce, nowadays the country has developed competitive engineering, pulp, steel and mining industries, which can compete on an international scale. The majority of Sweden’s trade flow is with the USA, Germany, the UK, Norway, Finland and Denmark. The country’s export sector has acted as the main engine in the nation’s economic growth since the 1990s, and the export industry has been quite robust. In recent years, the service industry has taken over from the more traditional sectors of paper, pulp and steel, and this has led to less vulnerability to international fluctuations. This has also meant, however, that the Swedish economy makes less of its money from exports, while the price of imported goods has increased.
Factors That Influence the Swedish Krona
The Swedish Krona has long been known to investors as a “risk on” currency, meaning that it tends to strengthen at times when the global equity markets are raised, and to weaken at times of risk aversion. There are several factors at play when it comes to determining the value of the Swedish Krona and the strength of the Swedish economy. These include the following:
- EU and global economy dependence – Sweden is very reliant upon the EU and global economies, and especially that of Germany, and therefore any slowdown or recovery of the global economy impacts on Sweden’s export trade.
- Riksbank control of the repo rate – Any changes made by Sweden’s central bank in the repo rate will affect the value of the Krona, with the currency tending to strengthen whenever the difference widens between the interest rates of the US Dollar and the Swedish Krona.
- Correlation between the S&P 500 and the SEK – Usually investors see a strong positive correlation between the S&P 500 and the Swedish Krona.
- The price of oil – As the Swedish Krona is a risk-on currency it follows the price of oil. Therefore, when the price of oil rises, the SEK will increase in value.
- Volatility – During periods of illiquidity, the Swedish Krona may be volatile.
- EU economy – Many of Sweden’s exports are sent to the EU, and therefore if the EU economy is in a period of slowdown, there will be a lower demand for Swedish goods and fewer exports made, thus affecting the value of the currency.
- Elasticity of Swedish export prices – Many of Sweden’s exports suffer from high price elasticity, which means that any change in demand may have a significant impact on the price of goods.
- Riksbank interventions to halt the strength of the currency.