SEK could become an interesting play as Sweden’s economy booms
The Swedish economy is on a roll following stellar Q2 GDP numbers and if this becomes a trend, the SEK could rally considerably further against USD and GBP.
USD/SEK pulled back from challenging the 8.000 level following strong US jobs numbers on Friday, but if Sweden’s economy continues to demonstrate robust growth that level could easily be swept away.
Recently, Sweden’s Q2 GDP came in at 1.7% versus expectations of 0.9% suggesting an annualised growth rate of 4.0% (though forecasts for 2017 are 3%) -- either number is still very robust for a developed economy. It appears to have been led by a big rise in capital investment. But going forward Sweden should also enjoy support from the faster growing Eurozone.
However, SEK is very dependent on events in the Eurozone (and the actions of the European Central Bank, in particular), the inflation rate and the attitude of the Riksbank. Right now, the central bank remains relatively dovish and though it’s pondering changing its monetary policy, it is keeping the repo rate at -0.5% and still guiding no movement until H2, 2018.
The Riksbank continues to view Swedish inflation as too low – it is currently 1.7% -- and below its 2.0% target. However, if the economy continues to motor, partly due to a very simulative monetary policy (the Riksbank is also doing quantitative easing), then it can only be a matter of time before inflationary pressures start to build pushing CPI at or above 2.0%. Wage inflation is currently below 3.0%, so still subdued, despite skills shortages showing up in the economy. But that could change.
Later this year onwards, the Riksbank could face pressure to start unwinding its unconventional monetary policy – a move it should find easier to execute than the ECB, which has to consider the circumstances and the reactions of national bond markets across multiple states, some of which still have fragile economies.
It’s worth noting that the Czech central bank recently raised its two-week repo rate to 0.25% from 0.05% - marking the first rate increase by a significant European country in several years.
But there are a few factors that could trip up SEK’s rally. One mentioned by the Riksbank itself, is that a stronger currency creates deflationary pressures and therefore reduces the need to tighten monetary policy. If SEK becomes too strong, the Riksbank may talk it down, which in the short-term will create volatility and shake out long positions.
Meanwhile, the country’s politics are looking rather messy following news that the details of millions of Swedes may have been leaked by mistake, which is threatening the minority government. High household debt is another potential hot potato – meaning if the cost of money rises too much it could derail consumer spending and hurt the economy.
For those looking to play the SEK rally, if and when it resumes, the best counterparts are likely USD and GBP – both of which have been looking relatively weak against currencies such as the EUR and SEK over the last few months.
TECHNICAL ANALYSIS: USD/SEK: consolidation likely
USD/SEK has fallen to levels last seen around late April/May 2016 and the historical support level of 7.8941 could eventually be in the cross-hairs. However, the pair seem to be building a consolidation above 8.0600, which is not surprising with the daily RSI in oversold territory and following a bounce off the lower Bollinger band.
What could follow from here are several weeks of consolidation or even a counter-rally – if USD has rediscovered its mojo following Friday’s strong jobs numbers. For SEK bulls, a period of consolidation could be a good thing as if and when the rally resumes it could be a strong one. Look for levels below 8.0600 and 7.9500 to be breached as a confirmation that the rally is back on.
Key support levels seen around 8.0601, 7.9573, 7.8941 with resistance pegged around 8.2100, 8.3039, 8.4381 and 8.6200-27.
By Justin Pugsley, Markets Analyst, MahiFX