Swedish Krona, Norwegian Krone, Trade Wars, Brexit – TALKING POINTS
- Swedish Krona, Norwegian Krone may rise in Q1 2020 amid a revival in trading risky assets
- Fundamental themes to watch include Brexit, US trade war with China and EU, Iran threats
- Policymakers closely watching Swedish financial system after Riksbank ended negative rates
Swedish Krona, Norwegian Krone Q1 Outlook
The Swedish Krona and Norwegian Krone may rise through Q1, 2020 amid a resurrection in market buoyancy as fundamental concerns are temporarily put on the back-burner. The demand for sentiment-linked assets like Nordic FX may continue to swell as upside pressure for anti-risk assets like the Japanese Yen and Swiss Franc are alleviated. Looking ahead, what are key macroeconomic themes traders should be watching?
US-China Trade War
The trade truce between Beijing and Washington and completion of “phase one” of their multi-sequential trade accord has helped to alleviate market angst. While China has expressed trepidation in the volume of agricultural purchases from the US, investors shrugged off this concern as they remained focus on what they perceive to be a major breakthrough.
If diplomatic relations do not further suffer from potential political wedges like the Hong Kong protests and growing tension over Taiwan that threaten to derail future talks, market mood may remain high. As such, easing bets from the Norges Bank may be alleviated despite the recent aggressive downside shift in the implied policy rates curve from its historical reading on November 15. This may then help push NOK higher.
The Norges Bank is expected to hold rates through Q1 after a period of aggressive tightening through 2019. As a result, it was unofficially referred to as “the last hawk” as other major central around the were engaged in an easing cycle. While no individual data point will necessarily tilt officials to become more dovish or hawkish, chronic underperformance could make policymakers more inclined to ease credit conditions.
The Riksbank is expected to hold interest rates for a prolonged period of time after it exited negative-interest rate territory last week. The decision was closely watched since it was the first central bank in known history to do such a thing. Now, policymakers will be closely watching to see how the Swedish economy and financial system adjusts to slightly tighter credit conditions and what potential vulnerabilities it may unveil.
Heading into 2020, it is unlikely that officials will vote to adjust interest rates in the first quarter. However, if economic data continues to chronically underperform and inflation fails to meet the central bank’s mandate, it could boost Riksbank rate cut bets. Besides Brexit, slower growth out of Europe, a key destination for over 70 percent of Sweden’s cross-border sales, is a major concern.
EU-US Trade War: The Next Frontier?
Following trade negotiations with China and the completion of the “phase one” deal, US policymakers may now turn their sights to the EU. United States Trade Representative Robert Lighthizer declined to answer whether or not Washington would rule out auto tariffs after US President Donald Trump missed a key deadline to impose them a few weeks ago. If EU-US trade relations sour, it could curb some of NOK and SEK’s upside potential.
Despite the market-friendly UK election outcome which helped boost sentiment and push Nordic FX higher, revived fears of a no-deal Brexit have pressured the British Pound and could eventually affect NOK and SEK. Starting on Monday, Prime Minister Boris Johnson will begin to meet with UK lawmakers heading into the new year as the January 31 deadline looms.
OPEC and Crude Oil Prices
As outlined in my Q1, 2020 forecast, crude oil prices may continue their ascension amid a renewal in market optimism and appetite for more risky and volatile assets – like Brent. With stronger demand and OPEC’s supply cuts, crude oil prices have strong upside forces – at least for now – pushing them beyond $60 a barrel. The petroleum-linked Norwegian Krone may rise with this tide and crash with it if the time comes.
Iran Tensions May Boost Norwegian Krone
Tensions between Washington and Tehran may also boost NOK. Earlier this year, a series of drone strikes and attacks on oil-carrying vessels pushed Brent higher as it stoked supply-disruption fears. Heading into the new year, relations between Iran and the US remains tense as ever, which opens the door for further escalation and potential price spikes, in crude and in the closely-tracking Norwegian currency.
Swedish Krona Technical Outlook
The Swedish Krona is the worst-performing G10 currency this year with – 4.18 percent total returns against the US Dollar. Recently, however, SEK has been rising against its major counterparts and is up almost four percent since mid-October. During the Krona’s rise, EUR/SEK rapidly fell and subsequently broke a multi-year uptrend as 2020 rate cut bets began to fade amid a buoyant sentiment climate.
Swedish Krona Index, EUR/SEK, 2020 Fed Federal Funds Futures Contract (Dec-Jan)
Swedish Krona index created using TradingView
Norwegian Krone Analysis
The Norwegian Krone has experienced a similar recent uptick, though the extent of its rise relative to its Krona counterpart has been less impressive. Since mid-October, the NOK index has risen less than two percent, though this in no way suggests there is no room for upside potential. The Krone’s rise came as 10-year government bond yields fall amid weaker Fed rate cut bets and reduced demand for anti-fiat hedges like gold.
Norwegian Krone Index, Gold Prices, US 10-Year Government Bond Yields
Norwegian Krone index created using TradingVie
OMX-S30 Outlook: Bearish Correction Ahead Before Index Resumes Uptrend?
Sweden’s OMX-S30 benchmark equity index has risen a little over 20 percent since it started the August uptrend, though negative RSI divergence shows upside momentum is fading. The index may have a bearish correction in the cards if it breaks below the uptrend, opening the door to support at 1664.35. From there, the OMX may trade sideways before investors have enough confidence in additional upside potential.
OMX chart created using TradingView
OBX at Mercy of Crude Oil Prices?
Norway’s oil-sensitive OBX equity index continues to climb well above February 2018 support, though the recent break below the August uptrend leaves room for a turn lower. If the index fails to resume its prior ascension, it may discourage traders which could lead to a selloff. Something to bear in mind is that, much like crude oil prices, the OBX’s trajectory is in large part determined by macro fundamental forces like the US-China trade war.
OBX Index, Crude Oil Prices
OBX chart created using TradingView
NORDIC FX TRADING RESOURCES
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter