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Low inflation and booming economy keep Krona range bound

Swedish KronaFor more than a year, the USDSEK (US dollar:Swedish Krona) remains range bound between 8.08 and 8.64. While the US dollar strengthened against most of the currencies in 2015, it was not so against the Swedish Krona. All the gains recorded by the US dollar against the Scandinavian currency were in the second half of 2014.

The currency pair once again hit the lower band (8.08) in the last week of March. So, does this provide an opportunity for a binary options trader to purchase a call option contract? The answer to this question lies in the reason for the range bound movement.

Sweden is in the list of best performing economies in Europe. While the rest of the western countries are struggling to grow, the GDP of Sweden, on a y-o-y basis, recorded a growth of 4.5% in 2015. According to the National Institute of Economic Research (NIER), the economy is expected to grow at a similar pace in 2016.

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The country is also facing acute housing shortage. Currently, the waiting period is eight years as far as the public housing is concerned. On the positive side, the construction activity is increasing thereby leading to more jobs and overall economic growth.

The historic record high influx of 160,000 refugees had created demand in the health care sector as well. Furthermore, the refugees contributed 0.5% to 1% of the GDP growth. The people continue to spend without any major concern because of the negative interest rate of -0.5%. However, in spite of this, the inflation continues to remain low. The inflation for December, January and February are 0.1%, 0.8% and 0.4% respectively. On the other hand the inflation target of Riksbank (Central bank of Sweden) is 2%. This is one of the major concerns. To achieve an inflation rate of 2%, the Riksbank continues to maintain a negative interest and even announced its intention to intervene in the market in a case where the Krona gets stronger.

Whenever Krona strengthens on positive economic data, the Central bank does all that is necessary (verbal intervention or interest rate cuts) to weaken the currency. With market participants on the higher end of the band and actions of the Riksbank at the lower end of the band, the currency remains range bound. So, even though the currency should strengthen fundamentally, the actions of Central bank do not let that happen.

Technically, the USDSEK currency pair is stuck up between a horizontal channel with upper and lower band at 8.64 and 8.08 respectively. The currency pair has started this week with a sharp bounce back, implying that the channel still remains valid.

USD/SEK Pair: April 8th 2016

USD/SEK Pair: April 8th 2016

A forex trader should take a long position at the prevailing level of 8.1500. A stop loss order should be placed at least 200 pips below the 8.08 level. Unwinding of the long position should be done when the price hits the 8.60 level. In the case of a binary options trader, a one touch call option contract should be purchased. A target level near 8.40 can be chosen with expiry date in the second or third week of May.

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