USD/SEK bears will be highly annoyed right now. The Krona has been steadily strengthening against the Greenback in recent years due to its AAA rating. Its close proximity to Euro-Zone makes it one of the most popular safe haven for EU investors wishing to escape EUR for more stable grounds. However, outlook for for Sweden has also been declining. This is not totally unexpected, as Sweden will definitely be bowed down by its largest trade partners suffering from economic instability. The impact of Euro-Zone on Sweden is not insignificant, with Finance Minister Anders Borg revising 2014 GDP estimates from an original 3.0% to current 2.2%. Unemployment rate is also expected to rise to an average of 8.4% in 2014, the highest within the Scandinavia region.
With this backdrop, today’s announcement by Central Bank Riksbank shouldn’t come as a huge surprise. In the latest rate decision, Riksbank chose to keep repo rate unchanged at 1.0%, while at the same time explicitly saying that repo rate will not be increased until the 2nd half of 2014. Though there is no mention of further rate cuts, the Central Bank would like rates to “remain at a low level for a longer period of time”, with a 2% inflation target in mind. One may think that such wording would imply likelihood of rate cuts especially if inflation remain deflated with rates remaining at current levels.
USD/SEK rallied more than 650 pips from 6.365 to above 6.43 after the statement was made, negating the bearish break that happened yesterday. There were signs that bullish reversal is underway with stochastic readings heading higher and price levels moving up, however nothing could have prepared traders for the huge long bullish candle that managed to break even yesterday’s high, before stalling just around 6.435 ceiling. Perhaps this may be a good case study for all traders to understand the importance of stop losses even when trades are going in your favor. Traders who have entered short below the 6.38 breakout would be currently heavily underwater if no protection was made earlier.
From the daily chart, the rally appears to be less significant as 6.45 support/resistance is still untested. Bulls of USD/SEK will need to break the level in order to gain a foothold against current bearish bias, though a push above 6.57 ceiling may be necessary for overall sentiments to be bullish, negating the downtrend set since Nov ’12. Stochastic readings suggest that a break into the 6.45 – 6.57 sideways zone is still in the cards as a bull cycle may be currently underway. However, it is important to note that with overall bearish trend still in play, we may need to filter counter trend signals such as this.
Fundamentally, a weaker Swedish economy outlook should see a weaker SEK, however in this case, US economic outlook may not be the brightest either. With QE3 still continuing without an end in sight, and unemployment remaining sticky, we could see USD continue to head lower in the near future, which will pull USD/SEK lower despite worsening fundamentals from the Scandinavian front.
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