Krona in Retreat as Swedish Recovery Evaporates: Market Reversal

Sweden’s krona is set to reverse its biggest monthly advance against the dollar since June 2012 as the nation’s growth stalls and trading patterns suggest limits to further appreciation.

A series of diminishing peaks for the krona point to the risk of a slump, according to JPMorgan Chase & Co. That may push the dollar to its strongest level versus its Scandinavian counterpart since 2010, technical strategists at the New York-based bank say, citing Elliott Wave Theory. The krona weakened through its 200-day moving average two days ago, a sign it may be set for further losses, as a report that day showed the economy unexpectedly shrank in the second quarter.

“There is clearly a row of higher highs and higher lows for the dollar versus the krona since February and that’s the definition of a bull trend,” spelling further weakness for the Swedish currency, Thomas Anthonj, a technical strategist at JPMorgan in London, said in a July 29 phone interview. “You can argue that the bullish view for the dollar versus the krona is certainly staying intact.”

The krona strengthened versus 14 of its 16 major peers in July, boosted by speculation earlier in the month that Sweden’s recovery would reduce the need for lower interest rates. The currency slid the most in more than three weeks after the report on July 30 showed second-quarter gross domestic product fell 0.1 percent, missing analyst estimates for a 0.1 percent expansion.

Triangle Pattern

The drop leaves the krona 3.71 percent stronger this year, according to Bloomberg Correlation Weighted Indexes, which track 10 major currencies. The dollar appreciated 5.6 percent in the same period, and the euro added 5.8 percent.

Sweden’s currency strengthened 2.8 percent versus the dollar in July and appreciated 0.6 percent against the euro. The krona rallied from 6.8654 per dollar on July 8, its weakest level in almost a year, to 6.4411 on July 23, the strongest level since June 19. It closed at 6.5576 per dollar on July 30, breaching the 200-day moving average at 6.5496.

The Scandinavian currency weakened 1.4 percent to 6.6081 per dollar at 1:44 p.m. New York time.

Technical indicators showed signs the krona’s appreciation was likely to falter before the GDP data was released. The dollar’s decline had taken it toward the base of a triangular chart pattern that had been forming since the beginning of the year, according to Stephanie Aymes, a technical strategist at Societe Generale SA in London.

“There is a conjunction of supports,” for the dollar versus the krona, Aymes said in a July 29 phone interview. “It’s building a base in the form of a broadening triangle. As long as we hold above 6.33 to 6.37 supports, there’s room to reach 6.82.”

Elliott Wave

The krona has the potential to weaken to 7.6280 per dollar, a level not seen since July 2010, said JPMorgan’s Anthonj, citing Elliott Wave Theory. That would mark a “third wave C” correction after the decline to 7.33 per dollar in 2012, which was potentially an “A wave” that laid the foundations for a greater drop, he said.

Elliott Wave Theory, created by American accountant and author Ralph Nelson Elliott in the 1930s, seeks to predict moves in financial markets by dividing past trends into five sections, or waves. The theory proposes that a five-wave gain or decline is followed by a three-wave move in the other direction.

The krona could even extend its depreciation to 9.4880 per dollar, Anthonj said, though this move would be unlikely before next year at the earliest, he said.

Slower Growth

Sweden’s second-quarter GDP contraction followed growth of 0.6 percent in the three months through March, the preliminary data from Stockholm-based Statistics Sweden showed on July 30.

Manufacturing expanded less than economists estimated in July as order growth slowed, a report today showed. An index based on responses from about 200 purchasing managers fell to a seasonally adjusted 51.3 from 53.5 the previous month, said Stockholm-based Swedbank AB, which compiles the data. A reading above 50 indicates an expansion. The index was seen falling to 53, according to the median estimate of seven economists surveyed by Bloomberg.

The central bank last month kept its main interest rate unchanged and said it would probably start raising rates in the second half of next year as the economy improves. The export-reliant nation’s recovery has been hampered by weak demand from the euro area as it struggles to emerge from the bloc’s longest recession since the introduction of the single currency.

The krona was fell 0.8 percent to 8.7330 per euro today, depreciating from its strongest level in two months at 8.5185 on July 23.

The decline may prove to be a significant turning point for the krona, said Dag Muller, a technical strategist at SEB AB in Stockholm, also basing his assessment on Elliott Wave Theory.

“It is possible that we’ve seen a correctional low” for the euro against the krona, signaling more weakness for the Scandinavian currency, Muller said in a July 29 phone interview.

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