The post-crisis atmosphere in the global economy has in many ways encouraged a foray into increasingly desperate monetary policy measures in an effort to restore economic growth.  While some have been named as solely unconventional, other Central Banks of developed economies have had to take policy one step further into the unknown.  Sweden in particular has had to experiment with more extreme measures in an effort to keep the Scandinavian economy insulated amid a downturn in global trade.  Although the advanced economy continues to hum along as evidenced by 3.30% annualized growth, Sweden is not without its own headwinds in a reflection of slowing fundamentals domestically.

The Fundamental Picture

On the whole, Sweden offers a mixed export economy that has managed to remain fairly stable during a period of increased global instability when it comes to trade.  However, like most developed economies, Sweden has felt the impact of creeping deflation over the past year, with the annualized rate of inflation at a mere 0.10%.  In-line with most global peers, producer prices have slipped, contracting by -1.40% over the prior year.  The Riksbank has taken a highly accommodative stance since 2011, with the end of the calendar year begin a wave of rate cuts aimed at fighting deflation and restoring GDP growth.  While monetary policy has been positive on the GDP growth front, it has been negative in other areas, namely inflation which has barely nudged to the upside.  Since the last hike, interest rates have fallen from 2.00% to -0.35% over the past 4 years in a growing sign policymakers are running short of tools.

While Swedish unemployment and growth may be lauded as the strong impact of monetary policy measures, the growing trade deficit shows just how ineffective negative interest rate policies are at fighting a downturn in global trade.  As an export economy, keeping the currency competitive was an imperative of the Central Bank and outright devaluation a tough pill to swallow amongst policymakers.  The easiest way to influence exchange rate policy is often through the implementation of monetary policy tools.  However, negative interest rates combined with quantitative easing do not necessarily always yield perfect results as evidenced by the current state of the real economy.  Despite interest rates in negative territory punishing savers, borrowing rates have surprising risen even though quantitative easing should theoretically pressure rates lower.  The broader impact of these policies has largely been the destruction of the Swedish Krona which has lost nearly 35% versus the dollar in the last two years.

The Technical Take

While the momentum apparent in the USDSEK currency pair has been based on fundamental policy decisions, the recent trend reflects continued uncertainty about the path of US interest rates.  Since peaking in the middle of April, USDSEK has gradually pulled back to the downside, reflecting a slight technical correction amid a drought in new monetary policy measures from either the Swedish Riksbank of US Federal Reserve.  On a medium-term basis, the equidistant channel formation emerging since March highlights the current trend lower with ideal Put positions taken at the upper channel line targeting the lower channel line with support sitting at the June lows of 8.0310.  Should the USDSEK pair manage to see a one-day candlestick close above the upper channel line it could be indicative of a potential reversal higher.  Ideally, a break suggests a channel-based breakout to be accompanied by renewed upward momentum and confirmed by higher than average trading volumes.  This scenario necessitates Call positions near the upper channel line targeting 8.8850.

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On a shorter-term basis, the technical indicators are starting to confirm the potential for a deeper correction in the pair as evidenced by the negative turn in both the 50-day and 200-day moving averages.  The recent crossover with the shorter moving average intersecting the longer moving average to the downside is a notoriously bearish sign, especially as the long-term moving average plateaus and starts trending lower.  While not necessarily as strong an indication as a “death cross”, when combined with the Relative Strength Index, the USDSEK pair looks slightly overbought at the moment.  Although the RSI is not quite at the strongest level for a sell signal, it could very well be signaling a downward reversal and excellent area to begin initiating Put positions targeting shorter-term support at 8.1000.  Any move below this level paves the way for the pair to test 2015 lows.

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Conclusion

Sweden in general might have been able to largely protect the domestic economy, but at quite a cost as evidenced by the waning tools available to the Central Bank to fight any future crisis.  Taking rates into negative territory has kept GDP growth strong but been unable to stoke inflation and keep borrowing rates low as evidenced by the uptick in 10-year and 30-year yields since the middle of summer.  Based on the outlook for continued accommodation and eventual policy normalization, the risks are generally to the downside for the Swedish Krona over the long-term, meaning Call positions to take advantage of the prevailing trend.  However, in the near-to-medium term, Put positions might be necessary to take advantage of a correction before the longer-term  USDSEK uptrend resumes.  The key will be upcoming GDP numbers and monetary policy decisions arising from the United States.