Strengthening Swedish Krona and Weak EU Stocks 50 Index
Posted on: 05 March 2018 , by: Darren Sinden , category: Market Review
Signal - Long USDSEK
USDSEK is not a FX rate that we look at as regularly as we should, but it's certainly an interesting one. It tracks the relationship between a relatively small, export lead European economy (that is not in the Euro ) and the world's reserve currency, the US Dollar.
The USA takes around 7.00 % of total Swedish exports putting it midway in the list of Sweden's top ten trade partners, the largest being Germany, Norway and Denmark.
The Swedish economy has recently been growing again (+0.8% in Q3 2017). The chart below plots the rate of GDP growth in Sweden over the last decade, a period which was very tough on the country. The legacy of the GFC still lingers and unemployment has started to climb once more. On the other hand, manufacturing PMIs, which are seen as a leading indicator, are rising back towards 60, having peaked at 65 in early 2017.
Over the last couple of years, a pickup in the PMI data has coincided with a rally in the SEK.This was evident in the last week of February where the Krona added +2.2% versus the Dollar, breaking it back to a bull trend in my midterm model.
The model’s target, over the medium term is SEK 8.58 to the Dollar - an area that we haven't visited on the chart since June last year. This recent Krona strength has put us back in touch with a downtrend line on the weekly chart that dates back December 2016, and the 50 day Moving Average just below it. I note that the Swedish currency had already moved above the 20 and 200-day variants. However, a break above that downtrend line would open the door to SEK 8.37, 8.45 and the deeper target of 8.58. To get here, the Krona will need to maintain its recent momentum. But there is no reason to think that couldn't happen as the USD SEK has remained a strongest bull trend in the model for almost a full calendar week after the signal.
The latest reading of Swedish Manufacturing PMI Data for February is due to be released at 9.30 GMT on Monday March 5th. Any improvement on the preliminary figure of 59.9 could help spur the currency upwards once more.
Trend - Short EU Stocks 50 Index
The EU Stocks 50 Index had a tough time in February as equity volatility exploded in the early part of the month. The index had been recovering through the later part of the short month, but that process may now have come to an end, Despite an air of relative calm returning to global equities, as the VIX volatility index fell back below 20 from its recent closing highs of 37.32. Measures of European equity volatility have undergone an even bigger downside correction at the same time.
Nonetheless, as we can see from the chart above, the index recently tried to rally. It filled a gap left over from the 5th of February at 3474.85 before failing and moving lower once more and filling another lower gap at 3444.23 as it did so. At the same time the 50 day EMA has been falling rapidly and is very close to posting a dead cross by moving to and through the 200-day line. The EU Stocks 50 Index moved back to bull trend on the 27th of Feb at 3475, but it firmly rejected that level after that; suggesting that this was a false breakout. Its weak strength and poor price action since then only adds weight to that supposition. We might now expect the index to test at and fall below 3400, whereupon 3475, 3333 and 3300/05 are all potential downside levels. The 8th of Feb low of 3214 would not be out of the question either, if the wider equity markets came under pressure once more.
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