The move by the Swedish Riksbank to follow the lead of the Swiss National Bank’s foray into negative interest rate territory has yielded results that defy conventional wisdom in spite of incremental gains in the economy as a result of these extreme monetary policies. Growth has remained largely intact and inflation in positive territory stands as an accomplishment for a Central Banker of any advanced economy in present times. Nevertheless, these incremental gains are not without risks as evidenced by the rapid appreciation of domestic real estate prices, leading investors to believe a potential bubble maybe forming in the sector. While, the Riksbank might be forced to taper its current strategy if forced to contain the risks of a housing sector meltdown amid rapid price appreciation, the risk of a further devaluation of the Krona is real especially if the Federal Reserve continues on its own path of policy normalization.

The Fundamental Picture

Interest rates in negative territory create numerous risks for an economy because it inherently incentivizes risky investment behavior as a result of skewed borrowing costs. In the case of Sweden, borrowing costs in negative territory have managed to blow a bubble in housing costs as price appreciation of real estate in major cities surges. From a pensioner’s perspective, zero rates is a nightmare, making it challenging to invest for retirement and live off of investment income. However, the Riksbank is left with few choices as far as how to manage policy amid the weak external situation and the outlook for inflation.

Inflation has managed to just barely climb back into positive territory, printing at 0.10% over the last three annualized readings. Nevertheless, until inflation shows that expectations of reaching back towards the Central Bank’s target are more anchored and on a positive trajectory, the Riksbank is unlikely to move on rates, especially in light of trying to keep the currency competitive for exports. Luckily, a byproduct of monetary accommodation and loose policy measures has been the boost felt in output. The annualized pace of GDP expansion has gradually accelerated, climbing to a 3.90% annualized pace, reverberating from the impact of monetary stimulus and quantitative easing from the Riksbank.

Monetary policy has been largely unchanged since July when the Riksbank opted to lower the benchmark interest rate by an additional 10 basis points to -0.35%. After taking rates into negative territory back in February to offset potential haven flows, the Krona has weakened modestly, remaining range bound for the better part of 2015. Now that the US Federal Reserve is embarking on a tightening cycle, it could be extremely positive the standpoint of USDSEK, especially if it helps keep the Krona competitive relative to peers while the US dollar surges higher. A risk to the outlook that has arisen from policy is rising yields despite an abundance of asset purchases. Should yields on bonds continue to increase, it could force the Riksbank to tighten its current policy measures, pushing the Krona higher.

The Technical Picture

While the accommodation and further divergence from more normalized monetary policy was intended to keep the Swedish Krona weak, in effect the USDSEK pair has remained largely range bound, with the Krona depreciation of -6.67% over the last year relatively modest considering the amount by which respective policies of the Central Banks have deviated. Key horizontal resistance sits at 8.8310 with long-term support at 8.1000. The prevailing strategy is to continue trading the range by establishing Call positions at the lower bound and Put positions at the upper bound. However, should USDSEK have a candlestick close above one of the key levels, it could be indicative of a range-based breakout with reward potential for 440-550 pips depending on the momentum.

With the relative strength index trending higher after nearing the 30 level, the USDSEK has moved away from oversold and now looks keen to rally back to the upside. However, both the 50-day and 200-day moving average are currently acting as resistance to any sustained upside. Despite a “golden cross” crossover from back in November, USDSEK has not experienced substantial bullish momentum, instead seeing the medium-term correction deepen to nearer to 60% of the last bounce off of support to the upside. With these factors in mind, a move above resistance should be treated as an opportunity to establish new Call positions while any move below support should be used as a point to initiate Put positions.

Conclusion

Although Sweden has been able to insulate the domestic economy from external developments, fending off deflation has been a challenge for the Central Bank as evidenced by the extremeness of monetary policy measures. While growth is strong, accelerating price appreciation in the housing sector could derail efforts intended to keep policy accommodative and the economy competitive. Now that the US is expected to diverge further on monetary policy, tailwinds for further depreciation in the Krona are evident, unless the Riksbank is forced to tighten policy in response to housing and inflation. While the near-term sees range-trading as the prevailing strategy, should the USDSEK pair breakout from the range, it could very well be accompanied by substantial price momentum, needing a Call position should resistance be broken to the upside or Put positions should key support be taken out.