Summary:

• Swedish government abandons its plan to increase taxes
• Opposition coalitions resigns from a no-confidence motion
• USDSEK looks well priced against the bond market

The Swedish currency has gotten a great deal of upbeat revelations lately. Firstly, the government decided to upgrade its macroeconomic forecasts penciling in higher GDP growth along with a larger budget surplus for this year (an increase from 0.8% to 1% of GDP). Secondly, the Swedish central bank briefed last week that it would consider changes in terms of inflation gauges which the bank aim for. That move would lift current CPI measures thereby it could be the SEK-positive news. The decision is to be made at its September’s meeting (6-7).

Even as the bond yields surged in the aftermath of the above-mentioned revelations, the SEK remained just little changed. As a result, a divergence seen between the 10Y yield spread and the USDSEK was entirely closed. Furthermore, another compelling story came in over the weekend, however a net effect could have been hard to reason out, at least on the face of it.

The bond market has already approached the ex-change rate, hence the USDSEK appears to be well priced as for now. Source: Bloomberg

Cutting to the chase, the Sweden’s minority government chose to withdraw two contentious tax rise proposals in order to avert no-confidence motions and get a budget bill passed before next year’s elections. Two dropped tax increase proposals concerned state income tax imposed on individuals and tax on small businesses. Both measures would have raised about 4 billion SEK annually.

The four-party opposition had threatened to call no-confidence motions if action on the tax increases had proceeded. The plans were abandoned amid solid economic growth and budget surpluses, as we mentioned a while ago. To sum up, even as two tax increases would have added a few billion SEK to the budget, it could have had an adverse impact in terms of policy uncertainty, if the ruling government would have been toppled in the wake of a no-confidence motion. All in all, this could act in favor of the SEK going forward, otherwise an effect might be enhanced by higher budget surplus and GDP.

The USDSEK broke through a support line at around 8.03 in a weekly time frame, a move fueled mostly by weakness seen in the greenback. Source: xStation5

Taking a closer look at a broader interval on the USDSEK one could notice that the pair has already broken out of a support line placed at 8.03. A test of 7.90 looks possible in the nearest future especially if the US dollar keeps on sliding. A pullback towards a broken level could constitute a decent selling opportunity as the pair could be already poised to move even as low as a round 7.0000. Having said that, a resumption of an uptrend in the Swedish yields could be needed to convince more investors to buy the krona.