Reasons to be long Nok/Sek

We are talking about two currencies, (NOK and SEK), which on any fundamental measure are very much undervalued. The most undervalued currencies in the G20 spectra, even.
However, I believe they will have two quite different scenarios to tackle near term. This will lead to one performing quite well (NOK), and the other one underperforming.


Norway

Admittedly, Norges Bank is (as usual), behind the curve, but have since cut rates fast, sinking the currency in the process. However, with expansive domestically funded measures around the corner, the NOK will have some good support going for it near term.

The Norwegian government has taken aggressive measures to support their economy. Now, fiscal expansions are normally currency positive as long as long as bond markets are willing to fund their deficits. In this case, it is taken one step further since the funding source for the fiscal measures will be the Norwegian Petroleum Fund, (renamed the Norwegian Pension Fund, but I will stick to the Petrol Fund in this text, since it is still the most renowned name).
This will have a substantially positive effect on the NOK.

The Norwegian Petroleum Fund have the majority of its assets denominated in Eur and Sek, since its holding are weighted in accordance with the importance of the trade relationship.
With the government intending to use up to 4% of the petroleum funds current asset value for fiscal measures, expect strong support for the NOK. Keylevel support in Eur/Nok will be the 9.31 level.

As a reference, until November of 2008, Norges Bank purchased foreign currency equivalent to 1500 MLN per day for the Norwegian Petroleum fund. These purchase have now stopped.

Actually, with the new expansionary fiscal approach, Norges Bank could potentially even become a buyer of NOK, as it repatriates petroleum fund assets. This would be the case if incoming oil revenues did not cope with the pace of fiscal expenditure increases and thus forced fundasset repatriation to cover up the difference.
Hence, the conclusion is that on a relative basis, there will be near term support for the NOK, at least from a government related FX flow perspective.



Sweden
Dominating and Sweden specific theme.
Well, ehhh, lets see,,,, at least two Swedish banks are "all in" into the Baltic states. The Swedish version of the subprime story. Not good.

The Swedish government forced the deal with the IMF and other Nordic states, Latvia, to NOT devalue the LVL. Yes, you read it correctly, it was MR Borg, the Swedish finance minister, who was the driving force in this according to IMF;s Christoph Rosenberg, Senior regional representative for Central Europe and the Baltics. Why would they do that? Any guesses? Well, the Swedish Banks wanted it.
So, what is the Swedish scope from here? With the Baltic states in kryptonite deflation mode, I would be very surprised if it took 6 months before they let go of the peg.
The decision not to unpeg, is one of the weirdest moves Ive seen. And this from a government that has extensive experience from the early nineties, when the WORLD as a whole was doing ok. It is simply irresponsible and everybody will pay extra for it in the end; the Swedish taxpayers and their economy. The Baltic populations and their economy, (yes, if Latvia unpegs, so will the others).

With Russia and Eastern Europe about to cave in, pegged currency economies will come under the most stress. They will depeg. Thus, consequences for the Swedish economy will be felt in a very harsh way when this takes place in the Baltics.

Bank bailouts, corporate bankruptcies, higher unemployment and imploding domestic demand are some of the consequences from the upcoming creditlosses. This will outweigh any domestic fiscalexpansion plans.
Hence, until the Baltic issue is solved, the SEK should have severe difficulties competing with the NOK on a relative basis.

I Buy NOK/SEK.



As usual, good luck.














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