By Russell Glaser
The SEK continues to trade higher after the Riksbank sounded more hawkish than expected and the German Constitutional Court Ruled in favor of the Greek bailout but said its ruling is no blank check for additional bailouts.
Yesterday morning the Swedish central bank announced its intention to hold interest rates steady at 2.0% citing concerns over public finances in Europe and deteriorating global growth prospects. The Riksbank also expects Swedish growth to slow in the near term.
Despite the pause, the Riksbank came off more hawkish than expected as it will only adjust its tightening cycle rather than coming to a full stop. The Riksbank indicated rates could rise to 3% in two years. Markets responded positively to the more hawkish tone by bidding the SEK higher as most expectations were for rates to stay near the 1.75% level.
Given the decision by the SNB to peg the CHF combined with rising Swedish interest rates, this will likely bring additional safe haven flows to the Swedish krona, a potential catalyst for the SEK.
Also supportive of the SEK was the ruling by the German Constitutional Court. The court upheld the first Greek bailout package but ordered any additional bailouts must be subject to a vote in the German parliament. The EUR has again come under pressure from Greek fiscal troubles. Greece recently announced it will fail to reach its budget deficit targets and the Greek economy will likely contract by -5.5% this year, down from -4.5%. Greek 2-year yields have risen to record levels on fears of a potentially unorganized Greek default.
As a result of the pressures in the eurozone and the search for safe haven currencies, the Swedish krona has performed well with the EUR/SEK falling from its mid-August high of 9.35 to test its August low of 8.9450 earlier in the day. Yesterday’s low is an important technical level as it is the 61% Fibonacci retracement of the May to August move. A close below this technical level and the market could turn its focus on the next support levels of 8.8750 and 8.8540 from the May and April lows.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.