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SEK May Fall on Riksbank Rate Decision, Eurozone GDP Data

SEK May Fall on Riksbank Rate Decision, Eurozone GDP Data

2019-09-05 03:30:00
Dimitri Zabelin, Junior Currency Analyst
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Riksbank, Swedish Krona, Norwegian Krone – TALKING POINTS

  • Riksbank is expected to hold rates at -0.25 percent, delay its tightening cycle
  • Officials have to balance policy to avoid recession and fueling credit bubble
  • USD/SEK, USD/NOK may temporarily retreat this amid US Dollar weakness

Learn how to use political-risk analysis in your trading strategy!

Swedish Krona May Fall on Riksbank Rate Decision, Outlook

The Swedish Krona may fall after the Riksbank delivers its rate decision and comments on the economic and policy rate outlook. Many economists are expecting for the central bank to delay its intended rate hike path for this year. This comes amid mounting evidence of a domestic slowdown and rising premonitions of a recession which has undermined the feasibility of implementing a credit-tightening policy measure.

How Will the Riksbank Climb out of Negative-Rates Hole?

SEK May Fall on Riksbank Rate Decision, Eurozone GDP Data

Weakening demand out of Europe – Sweden’s largest trading partner – against the backdrop of the US-China trade war has undermined Sweden’s growth prospects. As an export-driven economy, the Swedish Krona is sensitive to oscillations in global sentiment, particularly during a time of eroding fundamentals and geopolitical uncertainty e.g. Brexit, cross-Atlantic trade tensions.

On quarter-on-quarter basis, Sweden’s economy shrank to -0.1 percent after it previously grew 0.5 percent in Q1. But now, as fundamental trends continue to worsen, the Riksbank is finding itself between a rock and a hard place. On the one hand, the case for even more accommodative monetary policy – even though the Riksbank is already using QE – is growing stronger as economic weakness shows a need for loose credit.

On the other hand, the central bank runs the risk of fueling a credit bubble and increasing household indebtedness as consumers continue to borrow credit at ultra-low rates. There is also concern that a mortgage bubble may be developing and a correction in housing prices could put borrowers and the local financial system at risk. This could then spill over into the Baltic economies and pressure regional markets.

Tick, Tick, Tick…

SEK May Fall on Riksbank Rate Decision, Eurozone GDP Data

The Riksbank’s possible pivot would fall in line with a trend most central banks all over the world are following with either halting or reversing their tightening cycles. The ECB’s dovish tilt has been a particular point of interest especially after soon-to-be-President Christine Lagarde hinted she may push rates into deeper negative territory. Rate cut bets from the Fed rose recently after weak PMI data was released on Friday, pressuring the US Dollar.

DXY Index, USD/SEK Fall After PMI Data Misses, Boosts Fed Rate Cut Bets

Chart showing US Dollar Index

US Dollar chart created using TradingView

Norwegian Krone Facing Pressure from Brexit, Slower Growth, Weak Crude Oil Prices

Norway’s relatively bare data docket leaves the Norwegian Krone more exposed to external risks such as trade wars and Brexit. As an outward-facing and petroleum-based economy with most of its cross-border sales with Europe, NOK has been under pressure. Weakening crude oil prices – despite OPEC’s supply-cutting efforts – have proven futile as sentiment continues to overwhelm upside pressure from output cuts and Iran risks.

SEK, NOK May Fall on Weak US and European Economic Data

The Krona and Krone may also fall on US and German factory orders data if the report shows producers are anticipating weaker consumer demand. Eurozone economic data will also capture the attention of Nordic traders amid the regional slowdown. This would follow the report showing that the German economy – the proverbial steam engine of Europe – stalled in Q2 on a quarter-on-quarter basis.

USD/NOK TECHNICAL ANALYSIS

USDNOK is continuing to climb above the 18-month rising support channel, though this week the pair may come close to testing the upper bound of it. The persistent rise of the pair – despite the one and a half-month deviation – suggests an underlying bullish bias. Demand for liquidity and haven-linked assets like the US Dollar may continue to rise and be the wind beneath the pair’s wings.

USD/NOK – Daily Chart

Chart showing USDNOK

USD/NOK chary created using TradingView

USD/SEK TECHNICAL ANALYSIS

Much like USDNOK, USDSEK is strongly climbing above a critical, multi-month rising support channel. However, the pair may too suffer a brief retreat amid US Dollar weakness rather than Krona strength. Having said that, technical forecasting for USDSEK this week may be difficult in light of the Riksbank rate decision and the potentiall volatility that may ensue. Traders may be waiting to commit capital until after the announcement and outlook on policy.

USD/SEK – Daily Chart

Chart showing USDSEK

USD/SEK chary created using TradingView

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

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

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