It’s been a whirlwind of a morning for U.S. traders, who have been treated to four top-tier monetary policy decisions in last twelve hours (BoJ, Riksbank, BoE, and ECB), as well as some of the most reliable leading indicators for the U.S. labor market.
We’ll have a full rundown of the U.S. jobs data and a preview into tomorrow’s marquee NFP report out later today; this report will focus on how today’s European Central Bank and Riksbank decisions will impact the EUR/SEK.
Of course, today’s principal event risk was the ECB’s monetary policy decision. In the end, the central bank took the bold step of cutting both its main interest rate and the deposit rate by 10bps, to 0.05% and -0.2% respectively. Perhaps more significantly, ECB President Draghi also announced that the central bank would begin buying asset-backed securities in October in an effort to stimulate the moribund Eurozone economy. While the central bank still left one bullet in its chamber by refraining from buying sovereign bonds (a more extreme form of quantitative easing), the ECB’s aggressive easing today shows that the central bank is disturbed by stubborn disinflationary pressures throughout the single currency’s zone.
Meanwhile, across the Baltic Sea, Sweden’s Riksbank is also fighting a prolonged battle with deflation. In its monetary policy meeting earlier today, the Riksbank left its primary interest rate at 0.25% and suggested that it may not raise interest rates until late 2015 at the earliest. This decision comes after the central bank surprisingly cut interest rates by 50bps in July.
In our view, the Riksbank position is justified: headline annual inflation was exactly 0.0% in July, and with inflation expectations falling sharply, there is risk that the low price pressures could become entrenched, the greatest fear of all central bankers. With inflation in both the Eurozone and Sweden hovering precariously close to outright deflation, monetary policy could remain accommodative for years.
Technical View: EUR/SEK
After pulling back sharply early in today’s North American session, EUR/SEK is testing a massive support level at 9.1350. In addition to being a key area of previous-resistance-turned-support, this level also represents the 7-month bullish trend line off the February low and the 100-day MA.
At the same time, the secondary indicators are suggesting that this support level may give way at some point in the next week. The RSI indicator is dangerously close to breaking below support at 40, which has put a floor under the indicator through the 7-month uptrend. Meanwhile, the MACD is also turning lower below the “0” level, showing a possible shift to bearish momentum.
With all of these indicators converging at 9.1350, a bounce is possible heading into the weekend. However, if this floor breaks next week, there are no major support levels until the 200-day MA at 9.00.
Beyond just the EURSEK, one thing is for certain: traders will need to prepare for the risk of near-zero interest rates extending well into next year, if not 2016 after today’s dovish central bank decisions and comments.