The Bank of Japan is the only G10 central bank not to have tightened policy so far.

While it might seem that the weakness of these currencies is down to a common factor, such as interest rates, or growth dynamics, it seems that the reasons are very different.

On most measures, the yen is the weakest currency so far this year with the Norwegian and Swedish currencies vying for the next weakest spot. The yen’s fall has clearly been blamed largely on the fact that the Bank of Japan is the only G10 central bank not to have tightened policy so far.

More than this, BoJ members continue to argue that inflation will come back below the 2% target in time and hence there’s little support for the yen coming from expectations of future policy tightening. The weakness in the yen became so intense last autumn that the BoJ had to turn to intervention; something that seems to have worked up to now.

We might take this and suggest that the weakness in the Swedish and Norwegian currencies must be a function of similar monetary largesse. But both central banks have been hiking rates. The proclivity of both to publish very specific forecasts for interest rates could weigh on currency performance because rate hikes, when they occur, are rarely a shock.

In contrast, some central banks that have surprised with the timing and/or size of rate hikes during this cycle might have seen their currency benefit as a result. One that springs to mind is the Bank of England, particularly in light of the fact that the pound is the best performing G10 currency so far this year.

However, the Standard Bank thinks that the reasons for the weakness in Sweden and Norway is not really down to this flagging of rate hikes by their central banks. It also does not believe that there has been a common factor that has undermined the currencies. In the case of the Swedish krona, it actually seems that the bear trend could accelerate the more the Riksbank hikes rates. This is because a primary driving factor for krona bears seems to be the risk of significant financial fallout from the commercial property market.

Now, of course, commercial property is seen to be a threat in many countries given the change in working patterns after Covid. But in Sweden it is thought to be of particular concern thanks to things such as the alleged difficulty in refinancing and hefty banking exposure to the sector. If the Swedish krona’s woes seem to be related to vulnerability in commercial property it is seemingly far harder to find the source of the woes for the Norwegian krone.

In fact, we could argue that the krone should be one of the best performing currencies, not the worst given the huge surge we’ve seen in the country’s terms of trade following Russia’s attempted invasion of Ukraine. But that’s not happened. The 375-bps of rate hikes in the past two years is not miserly in global terms and we also have to bear in mind that Norges Bank was one of the first to get going with the rate cycle. Real rates are negative to the tune of 325bps if we use core inflation as a proxy for inflation expectations, which is quite low but we’re not sure that even this is the real key.

Instead, what we would point to is the fact that the krone has the least liquidity of the G10 currencies (with the Swedish krona not too far behind) and we think that at times when global uncertainty is high, central banks are hiking rates and asset price performance is poor, it is difficult to expect low-liquidity currencies to rally. Instead, they can tend to fall, irrespective of whether the economic fundamentals are good or bad.

These currencies might have different reasons for their weakness over the past year or so but what they seem to share is little imminent prospect of recovery. If that’s the case policymakers might have to work a bit harder in order to try to turn the tide.