On Tuesday, we previewed today’s high-stakes Riksbank meeting, concluding, “Sweden’s 0% interest rate may actually look attractive compared to the negative interest rates in the eurozone and Denmark. Therefore, the central bank may choose to cut interest rates slightly to -0.1% or -0.2% to prevent any further appreciation in the krona” (See “Riksbank Preview: Next in Line for Negative Interest Rates” below for more).
As it turned out, the world’s oldest central bank read the economic tea leaves the same way, opting to cut its benchmark repo rate to -0.1%, but it did not stop there. The bank also announced a relatively small QE program in which it will buy SEK 10B in short-term government bonds per month. Perhaps most importantly, the bank vowed to keep the repo rate in negative territory until the inflation rate rose to near 2%, a far cry from the current -0.3% y/y reading.
This aggressive easing now leaves monetary policy in Sweden roughly in line with neighbors throughout Europe, including Denmark, Switzerland, and the eurozone itself. Despite its modest size, the open-ended structure of the QE program confirms that the Riksbank is serious about fighting inflation and preventing a rise in the value of the SEK.
Market Reaction
Speaking of the SEK, both USD/SEK and EUR/SEK have surged in the wake of the Riksbank’s announcement. Despite general weakness in the euro of late, EUR/SEK is approaching its nearly 5-year high at 9.72, while USD/SEK has exploded to a fresh 6-year high near 8.50. The clearest trend, both on the chart and between the relative monetary policies, is in USD/SEK, which could easily extend its gains in the short-term, especially with both the MACD and RSI indicators remaining in bullish territory.
As we noted on Tuesday, the path of least resistance remains higher as long as USD/SEK remains above its 20-day MA, currently at 8.27. The next resistance level to watch will be the 78.6% Fibonacci retracement of the entire 2009-2011 drop at 8.61, which could come into play as soon as next week. If rates break that barrier, an eventual move up to 9.00 could even be in play.
(Source: FOREX.com)
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