NOK: Poised to go higher? - Rabobank

Analysis General

Published: 2/19/2018 7:37:00 AM

EUR/NOK is currently positioned just on top of the 100 day sma at 9.6359 and since the start of the year the NOK is the second best performing G10 currency after the JPY, points out Jane Foley, FX Strategist at Rabobank. 

Key Quotes

“Although the EUR recovered some ground at the start of February, over the past week or so the NOK has been re-claiming lost territory.  Key drivers for the NOK are the perceived probability of a rate hike from the Norges Bank this year as well as the outlook for oil.”

“In the middle of December, the tone of the Norges Bank’s policy statement was surprisingly hawkish. The Norges Bank warned that “the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the September Report.”  This lent support to the NOK into the very end of last year and through into January.  Last week, however, Norwegian January CPI inflation data disappointed with a -0.1% m/m drop.  This corresponds with a subdued 1.6% y/y rise, well below the Norges Banks target of 2.5%.  The core measure recorded an even more modest 1.1% y/y rise.  Although this was a setback for market hawks, in a speech last week Norges Bank Governor Olsen reaffirmed this risk that “this year, the policy rate may be increased for the first time in seven years”.  His comments also provide a useful insight into the thinking of the Norges Bank.  In particular his remarks that “we would be less worried about low inflation than if real economic prospects were also weak”, suggest that the Norges Bank may be keen to start normalising interest rates.”

“Norway is not the only country that has suffered in recent years from rapidly rising house price inflation. The recent correction in Norway can be linked with the macro-prudential measures that the Norges Bank has imposed on banks.  Nevertheless most central banks would rather use interest rates rather than macro-prudential measures as a measure of controlling monetary conditions in the economy.  In Olsen’s view, Norway was one of several small economies that “imported low interest rates and experienced rapidly rising house prices and debt” as a consequent of the global financial crisis.  In this period “low interest rates in large economies that were severely hit by the financial crisis quickly led to lower rates in countries where the cyclical situation, in isolation, would have implied higher rates. This was the case in Norway until oil prices fell.”  Olsen’s tone infers that now that “advanced economies have emerged from another challenging period”, the Norges Bank is likely to be following several major central banks by slowly reducing policy accommodation.”

“On February 28, Statistics Norway is due to publish Q4 wage data. As in the US and the UK, this could be a crucial indicator as to how quickly that first Norges Bank rate rise will come.  A Bloomberg survey conducted between February 9 and 14 suggested that the Norges Bank will hike rates in Q1 2019. This survey was before Olsen’s address on February 15 but will have been influenced by the softer than expected January CPI inflation release.  The previous Bloomberg survey pointed to a move in Q4 2018.  Unless the CPI inflation remains stubbornly low, we see risk of a policy move before year end.”

“Another key factor for the NOK is the outlook for the oil price. Last year it was noticeable that traditional oil related currencies such as the NOK, CAD and RUB lost their correlations with oil.  The value of oil had dropped so low that investment in the sector was failing to provide much of a driver for the economic outlook in these economies.  This year higher oil prices have started to reinstate some connection with the petro-currencies.  Following aggressive cost cutting and the better tone in prices, a more optimistic outlook is emerging for the sector.  Platts recently reported that Norway has benefitted from a rise in private equity investment including a record high 10 project development plans from companies potentially amounting to NOK125 bln.”

“Although the value of the NOK strengthened vs. the EUR in 2016, EUR/NOK has been mostly trending higher since early 2013. Although the looser monetary conditions implies by a weak currency and a low interest rates have not propelled CPI inflation higher, Norges Bank rhetoric suggests that it is on the cusp of raising rates.  We are optimistic that the NOK has the capacity to win back some ground this year and edge towards the EUR/NOK9.50 area by the end of the year.  That said, we would favour buying NOK on dips vs the USD.  We see scope for a move towards USD/NOK7.50 on a 12 mth view.”

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