G10 currencies are the most actively traded in the world. They comprise of the US dollar, Canadian dollar, Japanese yen, Australian dollar, New Zealand dollar, British pound, euro, Swiss franc, Swedish krona, and Norwegian krone.

Which one has performed the best since early 2010? It’s the Swedish krona, one of the more obscure G10 currencies, according to a RBC Capital Markets report.

Against the euro, it has gained about 13 percent since January 2010.  Against the US dollar, it gained 11 percent.

Why did this currency perform so well?

According to RBC, the krona is supported by strong economic growth, solid fiscal position, and a “central bank firmly fixed on its tightening cycle.”

Rate hikes started last July. Since then, it has been raised by 1.25 percentage points to 1.50 percent. 

RBC thinks by the end of 2011, the benchmark rate will stand at 2.50 percent.  It’s even possible that Sweden’s Riksbank will aggressively hike rates by 0.50 of a percentage point at meetings instead of the usual 0.25 percentage point-increment.

Moreover, the krona is undervalued, judging by its real effective exchange rate*.

Going forward, RBC expects the krona to continue its strength, although the pace of appreciation may slow down.

As for downside risk, RBC thinks the rate hikes may stop if the krona’s strength starts to detrimentally affect exports. So far though, that hasn’t been the case.

*Real effective exchange rate: inflation adjusted exchange rate of a currency against a basket of currencies from its trading partners. In the Swedish krona’s case, it’s currently “well below its long run average.”

Email Hao Li at hao.li@ibtimes.com

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