USDSEK Blasts to 4-Year High as Riksbank Joins the Global Zero Party

After holding off for as long as it could, Sweden’s Riksbank was finally forced to follow many other developed market central banks by initiating a Zero Interest Rate Policy (ZIRP). Earlier today, the central bank cut its repo rate from 0.25% to 0.00% in a unaminous decision, more than the 0.1% anticipated by economists and traders. Furthermore, the head of the Riksbank, Stefan Ingves, states that the bank was prepared to take unconventional measures, like outright quantitative easing, direct market intervention, or even an explicit cap on the SEK’s value, like the SNB initiated back in 2011.

The catalyst for this bold decision was Sweden’s persistently low inflation, which has been below the central banks 2% target since 2011 and recently dropped -0.4% m/m. As we noted a few weeks ago, the growing threat of deflation in the Eurozone is now being exported to the currency bloc’s immediate neighbors (see “European Spelling Bee” for more). At this point, the Riksbank appears likely to remain in an extremely accomodative posture until price pressures start to pick up, which may not be until 2016 or later.

Technical View: USDSEK

Not surprisingly, the unexpectedly large interest rate cut has prompted aggressive selling in the Swedish krona, especially against the US dollar. The USDSEK pair broke out to a new 4-year high above 7.33 in the wake of the announcement, but the pair has been in a strong bullish trend since bottoming 1,000 pips ago in mid-March.

After consolidating to digest its gains for most of October, the pair put in two clear Bullish Engulfing Candles* on the daily chart in the last two weeks, showing that bulls were aggressively stepping in to buy up the pair on short-term dips. Meanwhile, the MACD indicator has turned higher once again, showing a return to bullish momentum after the recent consolidation, and the RSI indicator has also pulled back from overbought territory, clearing the way for another leg higher.

Now that the pair has cleared previous resistance at 7.33, there is no meaningful resistance until 7.6740, the 78.6% Fibonacci retracement of the June 2010 – April 2011 drop (not shown). With both the technicals and fundamentals pointing toward a lower krona, the bias in USDSEK will remain to the topside as long as rates hold above the key 7.33 level.

*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous period before buyers step in and push rates up to close above the high of the previous candle. It indicates that the buyers have wrested control of the market from the sellers.