Two Potential Flaws in Selling Swiss Currency for Swedish

In at least half the instances when asked, your editor’s friends and family forget whether he’s been in Sweden or Switzerland over the past couple of years. Something about the “sw”-starting sound… and, well, perhaps blond locals. That said, investors retreating from the many perils of the quantitatively-eased US dollar and the GIIPSed-out euro should avoid the same mistake.

The Swiss franc, bedrock of calm in the storm-tossed currency ocean, has been losing a bit of its hedging luster when compared to its lately more highflying non-EU counterpart, the Swedish krona. Of course, that same performance, while spectacular, is much to your dollar-salaried editor’s chagrin.

Despite the recent opportunity there, a post in a Wall Street Journal blog points to why this potentially profit-maximizing strategy – of trading Swiss for Swedish currency – may be based on flawed reasoning.

According to The Source:

“First, the recovery in global risk sentiment will probably prove to be limited. Greece may have said it will swallow its austerity medicine but its lenders are still having a lot of trouble convincing each other how to provide a bailout that doesn’t look like a default. As a result, the risk of contagion to other euro-zone peripherals remains high and support for the euro itself has hardly been overwhelming. Hopes that the U.S. recovery is picking up steam has also contributed to the improved mood in the international investment community. But this too could all evaporate just as easily if new data fail to live up to the expectations of the optimists.

“All that aside, Sweden itself is providing reasons for players who are jumping on the krona bandwagon to be cautious. Like Switzerland, Sweden is a highly open economy, dependent on export growth to keep its recovery going. So, just like Switzerland, Sweden is finding that the recent stumble in global demand is taking its toll. On Friday, Switzerland discovered that industrial activity was slowing even more than expected, with the country’s latest purchasing managers’ index tumbling to 53.4 from 59.2. The problem is that similar data from Sweden were just about as bad. Its index fell to 52.9 from 56.1, taking it well below the long-term average of 55 and bringing warnings from economists that industrial activity could be contracting, with the PMI index under 50, by the autumn.”

While Sweden’s krona has shown promise over the franc in the midst of a briefly stabilizing economic situation in Greece, the post warns it may be just a short-term opportunity, perhaps to unwind in the second half of 2011. Given his most recent Swedish bills to pay, this editor wouldn’t be in line to complain over that outcome. You can read more details in the WSJ’s The Source blog on how selling Switzerland for Sweden is a mistake.


Rocky Vega,
The Daily Reckoning