Krona To Turn Volatile On Two Major Events This Week

Krona To Turn Volatile On Two Major Events This Week
September 3, 2018

 

The Swedish krona recorded its weakest level last week, as not seen since the 2008 financial crisis, underperforming its G10 peers and increasing the complexity of issues faced by the country’s central bank which is typically dovish. The currency has fallen to 9.1970 against a US dollar at the time when the country is heading for a historic election that is highly anticipated to turn the country’s political landscape upside down. The decline was aided, in part, by the weak retail sales data. While the krona is down 8% for the year, the country’s regional counterpart, Norway, has seen its currency krone appreciate by 0.9% for 2018. Swedish krona which is one of the top ten currencies by trading volume has underperformed even China’s yuan – hit by the trade issues with the US- and the UK’s Pound, which is under pressure due to Brexit uncertainty.

 

Upcoming elections and central bank meeting

The Swedish central bank, Riksbank, is scheduled to meet on September 6th to decide the course of the country’s monetary policy. So far, it has refrained from raising interest rates as it wants inflation to firm up near its 2% target. Although currently above target, the Central Bank has hinted that it will raise rates in 2019.

It should be remembered that Riksbank lowered its benchmark repo rate below zero in February 2015, as a measure to counter the risk of falling into a deflationary cycle. Many investors who had expected Riksbank to follow suit with the European Central Bank and raise interest rates this year, were left disappointed.

Global trade tensions have also forced the bank to postpone any interest hike decisions. Sweden is an export-dependent economy, and exports contribute almost 45% of its GDP. As a result, the country is vulnerable to US-China and US-EU conflicts.

Another issue faced by the krona is the national elections, which are scheduled on September the 9th. These could spell an end to decades of dominance by the Social Democrats if they win with only approximately 20% of the votes, as opinion polls forecast.

The political scenario in Sweden is set out as follows – the country has three main alliances:  Left Party, Green Party and Social Democrats who belong to the leftist coalition; the Moderate Party, Centre Party, Liberals and Christian Democrats who are a part of the “The Alliance”, and the Sweden Democrats who stand alone. None of the groups have a majority, however, the leftist coalition dominates Parliament with 148 seats. The Alliance has 129 seats, while the Sweden Democrats (SD) have 72 seats.

The far-right party (SD), which is expected to gain prominence, tows the line of anti-immigration while calling for a referendum, similar to the UK, to leave the EU.

Anders Eklof, a currency strategist at Swedbank AB in Stockholm highlights this fact while listing the reasons for the krona’s weakness. He said, “On top of all that we have the Swedish general election, which not least foreign investors have seen as a risk event with the Italian election, the U.K. Brexit vote and election of Trump fresh in mind.”

Carl Hammer, head of macro and FICC research at SEB Group believes that the krona could further drop by 1% if the Sweden Democrats win a majority of seats in the polls. His opinion is echoed by Petr Krpata, ING’s currency strategist, who expects the krona to decline further this year. Krpata said, “On the external side, the specter of trade wars is a clear negative for the krona as Sweden is a small open economy, thus vulnerable to concerns about the direction of the global trade.”

However, it’s not all bad news for the country as the stock market is up 6% so far this year, versus 1% fall of Stoxx Europe, as investors believe that krona’s weakness could further aid exports.

The steep decline of the past few days indicates that the market has already priced a dovish move by the country’s Central Bank on September 6th and a murky election outcome on September 9. As a result, contrarians believe that a short squeeze is due.  While the market expects a rate hike only by next year, there is a possibility that officials go back to their previous plan of a rate hike later this year. Under such scenario, the krona may rise sharply due to short covering.

Fredrik Lockne, an options specialist at SEB AB in Stockholm, stated:

“This is the last chance they have of pushing back the first rate increase or they have to raise the repo rate later this year. Right now the market is pricing in a deferral of the first hike well into next year. This suggests that we could get a substantial rise in volatility if the Riksbank sticks to its current path.”

Lina Fransson, a fixed-income strategist at SEB, is of the opinion that the central bank is not too happy about the recent weakness that was seen in the krona, stating “The krona back at these levels will surely come into play as regards the Riksbank’s meeting next week. Hence, we expect the Riksbank to try to avoid a dovish surprise.”

Ms. Fransson also stated that she expects the central bank to sound hawkish and point to a rate hike in December this year. Considering the fact that the market has priced in election outcome and the potential dovish move of the central bank, fundamentally, the downside seems to the over for the krona in the short-term.

The US dollar is expected to turn volatile this week as there are reports that President Trump wants to go ahead with higher duties on Chinese imports. So, technically, the krona has a chance to claim back some of the lost ground. The USDSEK pair has also formed a bearish shark on the chart. Therefore, currency traders who have a short position in the Swedish krona should stay alert and be prepared to wind off their position if there are signs of reversal.

USDSEK - Technical Analysis - 3rd September 2018

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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