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CURRENCY ANALYSIS

GBP/SEK: Spring Compression

GBP, SEK, Spring Compression, Pound Sterling, EU, Swedish Krona, Currency Analysis, fx trader, forex swedish-krona-currency-forecast02 Mar 2016

Currency markets are expressing a very pessimistic outlook for Pound Sterling. Part of the reason might be that the referendum election date came up quite suddenly. Prime Minister Cameron achieved a prospective settlement, obtaining the concessions at the EU summit. By 20 February, it was announced that the referendum vote will take place, 23 June, as opposed to the open ended date of “by 2017”. On the other side of the coin, the Swedish Krona, like the others in the Scandinavian region have become safe haven currencies as capital flows out of the Eurozone. It seems that the stronger European Union, non-Eurozone members have become the logical choice for capital outflows in spite of penalty deposit rates in excess of the ECB -0.30% deposit rate. This would make sense since trade and business has become very interrelated in the EU. In fact, it’s now beginning surface that should the UK secede from the EU, it could cost Brits jobs, both home and abroad and cause companies in the UK to relocate back to the continent1. Further, what of existing currency swaps agreements as well as central bank currency reserves? It will have a global effect, not merely local or regional. Hence, the Brexit would not only affect Sterling but it might weaken the Euro as well. Thus the need for EU safe haven currencies.

Sweden’s Riksbank has taken progressively stronger measures to defend the Krona. In the 2 July Executive Board statement2, it was specifically noted that, “...Since the repo-rate decision in April, the krona has also become stronger than the Riksbank had forecast... ...monetary policy needs to be even more expansionary to ensure that inflation continues to rise towards the target of 2 per cent... ...”  The board decided to cut rates further to -0.35%. In a little more than a month the Krona weakened against Pound Sterling; GBP/SEK achieved it’s 52 week high of 13.58481. However, shortly after achieving the high, the Swedish Krona resumed its strengthening trend against Sterling, likely related to safe-haven capital inflows.

At the time, the EU referendum story made occasional headlines, but nothing definitive was in sight. The nearest expected vote was by PM Cameron’s campaign promise for a vote by 2017. Nor was there any unexpected actions by the ECB at its 16 July policy meeting. Other events which more than likely created capital inflow were other global events as noted in the 3 September3 meeting: “... uncertainty over economic developments abroad remains high. This is illustrated by the summer's fall in oil prices and the recent wide fluctuations on the equity and foreign exchange markets resulting, among other things, from unease over developments in China and other emerging markets...”  If this was the general thinking then it became easier to predict an eventual EU response. The Krona would gain 8% on Sterling in just over two months from 13.58481 to 12.4708. Riksbank did act at the 28 October meeting by expanding its bond purchase program kr65 billion, targeting kr200 billion through 2016.

GBP, SEK, Spring Compression, Pound Sterling, EU, Swedish Krona, Currency Analysis, fx trader, forex GBP SEK Price Event ChartGBP/SEK Price Event Chart

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