28 October 2014 THE BIG PICTURE Sweden’s Riksbank steps up its fight against deflation The spotlight of the day will be on the Riksbank policy meeting where the consensus is for a rate cut. Sweden’s economy hasn’t improved since their last rate cut in early July. Inflation rate has been falling for months and recently it surprised the markets falling deeper into deflation at -0.4% yoy. Moreover, the country’s unemployment rate remains at high levels. Despite the unexpected 50bps rate cut at their July meeting, inflation did not pick up, which makes us believe that market consensus of a 15bps may not be enough for the inflation to revive. Yet, with interest rates getting closer to the zero bound, Sweden’s central bank is running out of conventional options. Our view is that the Riksbank could cut interest rates down to zero and revise down the repo rate path, pushing expectations of a rate hike back even further. On top of the rate cut, a dovish statement by Governor Stefan Ingves would likely keep the SEK under selling pressure. With no major economic releases or central bank comments overnight, things have been fairly calm for the major currencies during the Asian session. The dollar remained within ±0.20% range against its G10 peers. The only indicator released overnight was the Japan retail sales for September. The monthly figure accelerated however, leaving JPY intact. Today’s indicators: Besides the Riksbank meeting, Sweden’s retail sales for September are forecast to drop in pace, a turnaround from the previous month, while the small trade deficit in September is anticipated to rebound and turn into a surplus again. The mixed data are most likely to be ignored since they are released at the same time as the main policy rate. Riksbank’s Governor Stefan Ingves will hold a press conference following the rate decision. We have no major data to be released from Eurozone or the UK. Later from the US, the durable goods orders for September will take center stage. The headline figure is forecast to show a 0.5% mom rise, a rebound from -18.4% mom in the previous month. On the other hand, durable goods excluding transportation equipment are estimated to rise at a slower pace. Conference Board consumer confidence for October is forecast to remain near its seven-year high, adding to signs of an improved US economic outlook. The Richmond Fed manufacturing index for October and S & P/Case-Shiller house price index for August are also coming out. As for the speakers, in addition to Riksbank Governor Stefan Ingves, Norges Bank Deputy Governor Jon Nicolaisen speaks. THE MARKET EUR/USD stays virtually unchanged EUR/USD moved in a consolidative mode on Monday, remaining near the 50-period moving average and the 1.2710 (R1) resistance hurdle. Looking at our momentum studies, I see that the RSI remains above its 50 line, while the MACD, already above its trigger, appears willing to emerge above its zero line. Taking these signs into account, I would stay watchful of further upside, perhaps for a test near the lower line of the black channel, or near the 1.2840 (R2) barrier, which happens to lie marginally below the 23.6% retracement level of the 8th of May - 3rd of October downtrend. However, since the possibility for a lower high still exist, I will retain the view that EUR/USD is likely to be resuming the prior downtrend and that the recovery from 1.2500 (S2) probably ended near the 200-period moving average. As a result, I would prefer to stay to the sidelines for now. I would wait for a dip below the 1.2600 (S1) hurdle to reaffirm the case. Such a break could open the way for another test of the psychological barrier of 1.2500 (S2), which happens to be the 76.4% retracement level of the July 2012- May 2014 major advance. • Support: 1.2600 (S1), 1.2500 (S2), 1.2465 (S3) • Resistance: 1.2710 (R1), 1.2840 (R2), 1.2900 (R3)
Posted on: Tue, 28 Oct 2014 09:02:11 +0000
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