Swedish Kronor: GBPSEK Strength as Riksbank Fires Warning Shots
The Swedish Kronor’s strong up-trend against the British pound has stalled after the country's central bank said it is willing to intervene in foreign exchange markets to prevent further strengthening in the SEK.
According to a note from TD Securities: “The Riksbank’s concerns over SEK strength seem to be coming to a head.
Policymakers have made their clearest and most explicit warning to date that FX intervention may be imminent.”
The reasons given for the decision were that: “the krona has appreciated against most other currencies and if this continues it could jeopardise the upturn in inflation.” According to analysts at Scandinaviska Enskilda Banken (SEB),.
The announcement was timely as the GBP/SEK exchange rate had been flirting with disaster after touching the neckline of a large head-and-shoulders pattern, visible on the weekly chart.
A break below 12.2000 would open the ‘flood gates’ to a break down towards a target at 11.5400, calculated from a 61.8% Fibonacci extension of the height of the H&S.
A resurgence in the pound may also have played a part, after the currency shrugged off poor services PMI data and rose as a result of better-than-expected Construction PMI.
The general risk-off atmosphere caused by poor Chinese data and the interventionist policies of the Pboc have negatively affected the pound less than other currencies, as it has less exposure to China than most other G10 currencies.
Riksbank ‘swimming against tide’
TD Securities think the Riksbank’s move may be ill-advised, lacks “fundamental justification” and will be “blowing against prevailing winds:”
“we think such action lacks much fundamental justification.
The details of any intervention program will matter—as will its aftermath—but the Riksbank will be blowing against the prevailing winds favouring SEK appreciation.”
The SEK is cheap by many conventional valuation measures, but it has appreciated more quickly than their forecasts imply.”
TD’s analysts recommend not to close SEK longs yet, despite threats from the central bank:
“the Riksbank’s main goal is to slow rather than prevent SEK appreciation from here suggests that SEK longs still have their place, but only from better entry levels.”
Trade Balance hit record low
The extreme policy move may have been prompted by the release of data showing the widest trade deficit on record, at -5.2bn in October, which was a huge drop from the -1.7bn previously and a far cry from the 0.5bn expected by SEB.
Apart from the fact the data suggested the strong kronor was upsetting Swedish exports, the fact that it did not weaken after the release, was sign of underlying strength and may had increased the Riksbanks concerns.
Future Outlook Positive for Kronor
A growing number of analysts have forecast Kronor strength in 2016, some even hailing it as one of the potential stars of the currency firmament.
High Q3 growth and expectation smashing Retail Sales have increased expectations the Swedish Economy will she shown to have finished 2015 on a high.
Expectations of fiscal expansion in 2016 are also seen as helping to fuel the recovery, as the country invests in infrastructure and building works, partly as a result of the recent influx of immigrants.
Short-Term Recommendations and Daily Chart
The daily chart of GBP/SEK is showing the pair moving up towards the trend-line for the recent December sell-off.
MACD has crossed above its signal line, indicating the first tentative signs of strength.
Volume is in line with the strengthening up-trend.
The exchange rate has successfully broken above the S3 Monthly Pivot at 12.5820.
A break above the trend-line, confirmed by a move above 12.7000 would be necessary for confirmation of more upside, with an initial target situated at 12.7500.