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Can the Riksbank Save the Krona Amid Political Turmoil?

Can the Riksbank Save the Krona Amid Political Turmoil?

2018-11-14 07:30:00
Dimitri Zabelin, Analyst
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TALKING POINTS – KRONA, RIKSBANK, SWEDEN, ELECTION

  • Krona may suffer if snap elections are held in three months
  • Budget deadline to add further pressure to political gridlock
  • Can the Krona’s jump be sustained by a Hawkish Riksbank?

The Swedish Krona has been the victim of Sweden’s ongoing political gridlock that has gripped the nation since election.The rise of the Sweden Democrats (SD’s) is part of a broader regional trend of rising nationalism that is causing political fragmentation on the national and regional level. This has been a concern for markets given thepotential political and economic turmoil that will follow in the months ahead.

The two biggest coalitions – The Red-Greens and The Alliance – have refused to support each other in a minority parliament. They have also pledged to not work with the nationalist SD’s. This is done on principle, but also out of a strategic maneuver to not work with a party that has its roots in neo-Nazism. To do so would undermine any party’s credibility.

Two candidates have not been able to form a government – with a third likely failure on the way. Ulf Kristersson, head of the Moderate Party and leader of The Alliance will be voted on as PM on November 14th.

Adding to the pressure,Sweden’s parliament has to approve a budget for 2019 by November 15th. Under normal circumstances, a government would have already been formed by this time. Absent that, there are measures to put forward a “neutral” budget by the current care-taker government. The disagreement in budget talks between the various parties and coalitions has signaled a potential re-arrangement of party and bloc allegiances in the Riksdag.

However, the Krona may be saved from the political drama. The Riksbank is considering raising rates for the first time in over seven years. The first rate hike will likely be in December. This came amid positive inflation data that has reached a point that is conducive for a shift in policy after almost a decade of expansionary policy.

USD/SEK in recent months has formed what looks to be a rising wedge, indicating a potential bearish reversal. Negative RSI divergence also signals that the pair might be topping out. Support that was established in the beginning of the year has now turned into a resistance with a new ceiling extending since mid-August.

US Dollar vs Swedish Krona - daily chart

If the wedge floor is broken, the next line of support may be the swing-low the pair saw in late September. If this too is broken, the next level of support will be the former 2017 resistance line.

USD/SEK TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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