US Dollar Outlook, Nordic FX, Trade War
- US Dollar may catch haven bid on risk aversion from trade wars, FOMC minutes
- Cycle-sensitive Norwegian Krone, Swedish Krona may experience high volatility
- USD may also rise if FOMC minutes cool ultra-aggressive Fed cut expectations
Nordic FX Expected to be Most Volatile G10 Currencies Under GBP
Note: GBP is colored differently to highlight the impact of political uncertainty (relating to Brexit) on Sterling
The US Dollar may rise against the Swedish Krona and Norwegian Krone if trade war risks fuel demand for anti-risk assets. The FOMC meeting will likely be the key event risk for the week and could boost the Greenback if the underlying message reinforces the Fed’s data-dependent approach and cools rate cut bets. Officials from the central bank will also be speaking throughout the week and may elicit cross-asset volatility.
US Dollar Outlook: FOMC Minutes May Cool Rate Cut Bets
Last week, markets were hit with dismal US economic data with a manufacturing report showing the softest print in a decade. Friday’s non-farm payrolls data for September came in at 136k and missed the 145k estimate. Markets have taken note of the recent weakness in key economic data and have priced in further easing from the Fed, though Chairman Jerome Powell’s comments on Friday may have cooled the rise in rate cut bets.
Mr. Powell acknowledged that the world’s largest economy faces risks but that overall it is in a good place. This was preceded by cautiously upbeat commentary from other Fed officials throughout the week. The biggest risk to the economic outlook across the board is the ongoing US-China trade war which has dampened consumer confidence and made businesses hesitant to expand their enterprise in an uncertain environment.
US-China Trade War Updates
Early into Monday’s trading session, China expressed trepidation in moving forward with the US’s trade deal. This comes ahead of Chinese Vice Premier Liu He’s visit to Washington DC on October 10. If talks go poorly, the US Dollar may rise at the expense of equities, NOK and SEK. Fed rate cut bets may also rise, but their downward pressure on USD may be overwhelmed by the upside push for if demand for anti-risk assets.
Norwegian Krone Eyes Local GDP, CPI, Norges Bank
In addition to external risks, NOK will be closely watching the publication of local GDP and CPI data along with a speech from Norges Bank Governor Oystein Olsen. The central bank has raised rates this year three times, going against the global gradient of broad easing from monetary authorities. Slower growth out of Europe and waning demand for oil may soon haunt the Norges Bank and pressure their hawkish stance.
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Swedish Krona Braces for Critical CPI Data
Swedish Krona traders will be closely watching for the CPI data dump on October 10, where year-on-year price growth is expected to show a 1.3 percent rise, slightly lower than the previous 1.4 percent print. The Riksbank’s meeting minutes on September 19 highlighted uncertainty about Brexit as a key risk and noted that high household indebtedness and developments in the housing market pose a threat to the economy.
In this regard, the central bank is caught between a rock and a hard place. On the one hand, downside risks continue to grow, and inflationary pressure may soon wane which may therefore require more easing. On the other, the benchmark interest rate is already at -0.25 percent which has incentivized borrowers to take on more debt because the cost of capital is so low.
Policymakers may now fear that a continuation of ultra-easy credit conditions may fuel a bubble which if popped could cause significant volatility in financial markets. These concerns are compounded by the prospect of an iterated ripple effect that may spill out into the Baltic states that are already facing headwinds from slower global growth and waning demand out of Europe.
USD/NOK Forming Double Top Reversal Pattern?
USD/NOK appears to be forming bearish Double Top reversal pattern after the pair touched key resistance twice at 9.1648 but failed to break above it. Traders will now be carefully watching to see whether USD/NOK tests key support between 8.8850-8.9100. A break below it with follow through could lead to an accelerated selloff.
USD/NOK – Daily Chart
USD/NOK chart created using TradingView
USD/SEK Technical Analysis
USD/SEK continues to climb along the June rising support channel and is hovering around a familiar support zone between 9.8163-9.8389. A break below it could expose the pair to test the dominant uptrend where traders may be waiting to add additional exposure if the pair bounces back.
USD/SEK – Daily Chart
USD/SEK chart created using TradingView
NORDIC FX TRADING RESOURCES
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter