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Analysis / Business

Will The Krona Lose Its Appeal As ‘Carry Trade’ Currency?

Krona

The Swedish Krona has long been regarded as an effective carry trade currency, or a currency which is borrowed with low interest in order to invest in an asset (bonds/currencies are a popular choice) which has a higher chance of providing a greater return. Due to a variety of economic factors, the Swedish krona’s appeal as a trading currency is now in question, and it could be the case that other currencies become more attractive for traders looking to take advantage of carry trade currencies.

Riksbank

The Swedish central bank recently announced that it would be keeping interest rates at -0.5%, and would be ending its bond program. This suggests that significant changes ore on the horizon for the Swedish economy, or at least the way the krona will be regulated and valued in the future. The potential for appreciation could have significant implications for the currency as a carry trade currency, given that it may become harder for investors to benefit from the currency if it increases in value.

Other Currencies

It is not as though the krona never had competition as a carry trade currency. The yen is also a popular choice amongst traders for investing in higher yielding assets, and it could well become even more popular if the krona falls out of fashion. Given that it is possible to trade on the value of the krona against other currencies like USD and GBP through ECN brokers, its potential as a carry trade currency will likely be closely monitored, with any significant appreciations negating its appeal.

Volatility

It is worth noting that 2017 was a fairly volatile year for the krona, which was bound to cause concern amongst those looking for a steadier investment. Lower volatility in a carry trade currency is usually regarded as better than higher volatility, given that trades using less volatile currencies usually perform better. This period of high volatility no doubt instigated some concern amongst those using the krona for carry trades, and with the currency now set to appreciate, it may well offer far more limited opportunities for carry trading in the near future.

Appreciation

As previously mentioned, one of the main reasons that the krona is losing its appeal as a carry trade currency is that it is appreciating in value. This is a result of European economies starting to recover, meaning that the dollar is not as strong as it was at the start of 2017 (with Sweden also benefitting from this). For investors looking to purchase dollars with the Swedish currency, this could be bad news, and they could well struggle to fulfil their investment goals should any appreciation continue into the future. Nothing is certain though, and investors will no doubt have to wait until a clearer, long term picture of the krona’s appreciation emerges.

It seems highly likely that the krona could stop being used as a trade currency given the current circumstances the currency faces. If its appeal is lost, then it is likely that traders will be more inclined to invest in other popular carry trade currencies.

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Zak Goldberg is a Law & Business Graduate from the University of Leeds who has chosen to follow his aspirations of becoming a full-time published writer, offering his expertise on all areas of law and finance.

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