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USD/SEK to Rise on Political Gridlock - Swedish Snap Election in Sight?

USD/SEK to Rise on Political Gridlock - Swedish Snap Election in Sight?

Dimitri Zabelin, Analyst

TALKING POINTS – Riksdag, Swedish Election, Krona, EU

  • The speaker of the Riksdag will propose a third candidate for PM Wednesday
  • If four candidates are rejected it will trigger a snap election in three months
  • Continuing gridlock will begin to weigh more heavily on the Swedish Krona

See our free guide to learn how to use economic news in your trading strategy!

WHAT IS GOING ON WTH SWEDEN'S GOVERNMENT?

Sweden’s parliament – the Riksdag – has been in a gridlock ever since the inconclusive election in September. Both the center-right and center-left bloc failed to gather enough votes to form a majority, and the third largest party is held by the Sweden Democrats (SD), a nationalist group with neo-Nazi origins.

All major parties have refused to cooperate with the SD’s, because to do so would destroy that affiliated party’s political credibility.

Parliament has so far voted down Ulf Kristersson of the Moderate Party and Stefan Lofven of the Social Democrats Party as PM candidates. This came after several failed attempts to form a government by the aforementioned and Annie Loof of the Center Party.

The Riksdag has a system that is called negative parliamentarism, where a PM candidate does not need a majority to vote for him/her but rather a majority to not vote against him/her. In this regard, parties can show passive support by abstaining. Why this is important to know is last week, the Center and Liberal parties agreed to offer passive support to Lofven in exchange for him adopting center-right policies on tax and labor reform. The agreement also stipulated that Lofven kick the former communist Left Party out of his coalition.

Understandably, the ousted party took the news poorly, and the leader Jonas Sjostedt stated that he cannot accept having no say in policy. The Left Party, along with the SD’s, Moderate Party, and Christian Democrats will all almost certainly vote against Lofven as PM if the Speaker recommends him on Wednesday to parliament. This would be the third strike out of four that Sweden’s constitution allows before a snap election would take place within three months. The vote for the candidate will take place Friday.

If he is rejected, the Speaker announced the next vote will be held on January 23 or possibly 25. The fourth candidate – if the third fails – will be revealed early next week. It will likely be Kristersson If a snap election is held, the Sweden Democrats are more likely to outperform in the second election than the one in September. This would give them even more leverage in parliament than they have now, and that would almost certainly exacerbate the political crisis.

As I had expected last year, the danger behind political fragmentation and gridlock is it can lead to parties adopting policies that are an ideological deviation from political group’s placement on the political spectrum. This inevitably leads to unpredictable economic agendads that will likely affect monetary policy.

Right now, in Sweden, there is a leftist caretaker government in power that is run by a PM who lost a vote of no confidence and had a center-right budget passed in the parliament. And now, he is looking to form an informal coalition with center-right parties, while simultaneously threatening to split the Moderate-led Alliance coalition that has existed for over a decade.

The lesson behind Sweden’s parliamentary crisis is that it may be the writing on the wall for what the world might see in the EU Parliamentary elections this year. The only difference is the EU elections will affect far more people, and the consequences will be more grave.

WILL SWEDISH ELECTIONS IMPACT USD/SEK?

As the crisis worsens – amid broader concerns of slower domestic growth – USD/SEK will likely climb higher. Riksbank officials and investors who initially showed little concern over the political crisis – because they generally view Sweden as a stable country – are now becoming increasingly worried of the potential economic impact.

USD/SEK is reaching toward a key support range that if accessed and subsequently broken could open the door to greater upward movement. The pair for the time being are temporarily trading between 8.8469-8.9598, but only in the short term.

USD/SEK – Daily Chart

USD/SEK to Rise on Political Gridlock - Swedish Snap Election in Sight?

USD/SEK will likely have a prosperous year ahead given the potential obstacles the global economy faces in 2019 along with gloomier outlooks for growth in the Nordics.

Click here to see my outlook for the Swedish Krona and Norwegian Krone!

USD/SEK TRADING RESOURCES

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

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

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

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