NORDIC FX, NOK, SEK WEEKLY OUTLOOK

Nordic FX markets eyeing US GDP, IMF growth outlook as risks tilt to downside

Crude oil prices , commodity-linked currencies may fall if outlook appears worse

Swedish economic data dump on July 25 may cause short-term volatility in SEK

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US GDP DATA, IMF REPORT MAY KINDLE RISK AVERSION AND WEIGH ON NORDIC FX

Swedish Krona and Norwegian Krone traders will be in a for a volatile week ahead of the release of critical economic data and high-impact political developments. US GDP data for Q2 will be published with expectations the economy grew 1.8 percent, the slowest rate of expansion since the first quarter of 2017. Since February, economic news out of the US has been tending to underperform relative to economists’ estimates.

Furthermore, a slew of other critical reports will be released which may either mitigate or compound the market impact of GDP data. Other reports will include durable goods orders and personal consumptionhousing data. The former may act as a proverbial canary in the coal mine insofar that may give insight on how consumers feel about the future. Why buy a house before a downturn?

RED, WHITE AND BLUE…BUT MOSTLY RED

Note: Data shown in red indicates underperformance, blue means better-than-expected

Markets will also be eyeing the publication of the IMF’s World Economic Outlook update, which in January was titled “A Weakening Global Expansion”. Escalating trade tensions were cited as a key source behind the uncertainty clouding the outlook for world growth. Rising protectionism and the effect of political contagion appears to now be impacting the developing world with the rise of inter-emerging market trade wars.

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HANDLING THE DIVORCE PAPERS: THERESA MAY TO ANNOUNCE HER REPLACEMENT

On July 23, UK Prime Minister Theresa May will be announcing her replacement. Her successor is anticipated to be former Foreign Secretary Boris Johnson, though his ascension to the post looks like it will be paved with great difficulty. A number senior ministers have threatened to resign if he is elected as a result of their disagreement with Johnson’s willingness to go through with a no-deal Brexit.

The notable MPs who have threatened to resign are Chancellor of the Exchequer Phillip Hammond and Justice Secretary David Gauke. This comes amid news from The Times that the European Commission is looking into delivering Ireland a multi-billion Pound aid package as a way to mitigate the potential economic damage from a no-deal Brexit.

EU leaders are perceiving that the likelihood of a no-deal outcome is growing increasingly likely in part due to Johnson demanding unrealistic concessions that the European bloc is not ready to deliver. The uncertainty around the situation will likely continue to dampen sentiment around the world and more specifically in Europe. Riksbank officials continue to cite Brexit as one of the biggest risks facing the Swedish economy.

TENSION IN IRAN ESCALATES AS UK TANKER IS SEIZED BY REVOLUTIONARY GUARD

On Friday, crude oil prices edged higher after new broke that Iran’s Revolutionary Guard had seized a tanker bearing the flag of the UK in the Strait of Hormuz. UK Prime Minister – soon to be former – will be holding an emergency meeting on July 22 to discuss security concerns for other UK vessels traversing through the critical choke point.

Foreign Secretary Jeremy Hunt has stated the UK plans to implement measures this week but did not provide specific details. This followed a threat from the government that Iran faces “serious consequences”, though other officials sought to dial down the rhetoric. Tensions between Tehran and the West have significantly escalated since Washington reimposed crippling sanctions against Iran.

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ECB RATE DECISION: HOW LOW CAN YOU GO?

This week, the ECB will announce its rate decision and outlook for European growth. Overnight index swaps at the time of writing are showing a 49.1 percent market expectation that the central bank will cut rates, though this spikes in September where the implied probability is over 90 percent. In addition to rate cuts, President Mario Draghi also alluded to reintroducing QE if the economic conditions warrant it.

As Sweden’s and Norway’s largest export partner, what happens in Europe – politically and economically – is of great concern for the Nordics. Waning demand out of the EU continues to weigh on the exports of outward-facing economies that rely on healthy European growth. A rate cut or dovish commentary may hurt EURSEK in the short run, but the longer-term outlook suggests EURSEK may strengthen amid risk aversion.

SWEDISH DATA DUMP: VOLATILITY AHEAD FOR SEK CROSSES

As export-driven economies, the Swedish Krona and Norwegian Krone are sensitive to changes in risk appetite. NOK in particular is vulnerable to this threat because of Norway’s heavy reliance on the petroleum industry to support its economic growth. While crude oil prices have fallen, they remain well above Norway’s break-even point which offers the central bank the luxury to remain hawkish as its peers turn dovish.

On July 25, a slew Swedish economic data will be published that will likely cause some short-term volatility in SEK crosses. Some of the notable reports include the economic tendency survey, manufacturing confidence, consumer confidence, the unemployment rate and household lending. The latter may become a more heavily-watched indicator due to Sweden’s growing household debt and vulnerability to an economic downturn.

Riksbank policymakers have acknowledged alarming levels of debt in the country and have cited the need to introduce macroprudential policy measures to address it. Relative to the size of its economy, Sweden has one of the largest financial markets in the world – even bigger than Switzerland’s. A financial meltdown in Sweden could ripple out into the Nordic and Baltic states and eventually make its way to Europe.

Tick, Tick, Tick…

SWEDISH KRONA, NORWEGIAN KRONE TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter