It wasn’t until 11 November that the cross began a steady downtrend crashing through 52 week Fibonacci retracement levels one after the other. There were several other negative global financial issues at the time, most notably commodity prices, particularly that of crude petroleum and China’s volatile asset markets. The momentum of the Brexit debate was also building and more than likely, investors may have begun to perceived Sterling as ‘less secure’. Certainly, financial institutions and central bank economist had to begin to consider the probabilities of Brexit and begin to pre-position for such an event. Financial markets may have also been alarmed by increasing political rhetoric. For example, PM Cameron had even suggested that the EU should be a multi-currency union4, in particular “...that the EU has more than one currency...”

On 18 December, PM Cameron made clear that the negotiations were in full swing, telling reporters5 that he was “a step closer”,  “well on the way” and expecting to “bring it home” by the next European Council meeting. Indeed, the PM was true to his word. The first sure signs that an agreement was near occurred on 5 January, when PM Cameron told Parliament6 that when an agreement was reached “...it will be open to individual ministers to take a different, personal decision while remaining part of the government...” An agreement was announced on 19 February and the vote set for 23 June. The Krona was approaching a 52 week high against sterling.

The December Riksbank Executive Board Meeting, at which rates were maintained,  occurred well after the ECB reduced a further 10 basis points to -0.30. However, at the next Riksbank meeting, 10 February 2016, a surprisingly deeper repurchase rate reduction was announced: 15 basis points to -0.50% from -0.35% as well as the reinvestment of returned principal and interest of government bonds. The boarded noted “...Growth in the Swedish economy is high and unemployment is falling, which suggests that inflation will rise in the period ahead...”  Although the board didn’t directly reference the EU-UK agreement, it did make a curious note that “...uncertainty regarding global developments is still high, with low inflation and several central banks pursuing more expansionary monetary policy. Swedish monetary policy must relate to this...” As Governor Ingves noted, the Swedish economy was doing so well that inflation is expected to rise; yet Riksbank cut. The UK economy is doing just as well, and the BOE has not indicated a rate increase any time in the near future. Yet, the Krona is steadily gaining on Sterling? 

The point is this: Riksbank is defending an increasingly strengthening Krona, most likely due to capital inflows from Eurozone members impacts the Krona. It’s reasonable to conclude that capital flight or resulting capital reallocation is being caused by the addition of financial institutions, globally, pre-positioning ahead of the 23 June UK vote.  

If the polls swing one way or the other, so to the GBP/SEK cross. If the UK votes in, a sharp reversal should result; if out a secession plan will be required, buying time and likely creating a relief rally. In either event, a reversal is more likely than not at some point.

Mike Scrive
Technical Analyst
Accendo Markets

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1 Reuters 13-11-2015
2 Riksbank Press Release 2-7-2015
3 Riksbank Press Release 2-9-2015
4 CNBC Europe 5-12-2015
5 BBC 18-12-2015
6 BBC 5-1-2016