Market positioning more than fundamentals is our chief concern at the moment. The euro has lost nearly 5% against the Swedish krona this month as flows poured in. However, with the market over-extended and heavily positioned, a small piece of news could trigger a reversal. In fact such a reveal may be in the works and the euro may close above its 5-day moving average against the krona since February 8, which illustrates the pace of the downmove.
In addition to the general firm dollar tone, news that the Swedish government agency that guarantees housing credit is on the wires warning that the Swedish housing market is in the middle of a bubble and house prices could fall 20% and reduce GDP by 10-20%. In its report is claims the decline can happen slowly through inflation or quickly through nominal price declines.
As part of the debate among central bankers about asset prices, bubble and the role of monetary policy, Sweden's Riksbank appears to agree with the US Fed over ECB officials. It has indicated that it cannot use interest rates to guide the real estate market. Other Swedish officials do not seem to be as concerned about a bubble in the housing market.
The take away point here is that the market appears very long the krona. Fundamentals are generally supportive, we'd agree, though the risk of a reversal appears to be increasing. Watch the SEK9.8050 area on a close basis today. A close above there could be an other early signal that the correction as at hand. Short term traders may want to anticipate as shake out of SEK longs, while medium term investors may want to be patient and wait for the pullback to buy SEK. The intial target comes in near SEK9.90.
Disclosure: No positions