NOK: Norges Bank will lead the way – Nordea Markets

Joachim Bernhardsen, Research Analyst at Nordea Markets, notes that the NOK has remained remarkable weak and as a result they have lifted their EUR/NOK forecast, but still expect NOK to strengthen ahead as Norges Bank most likely will tighten monetary policy more than currently priced in.

Key Quotes

“It isn’t hard to argue that the underlying conditions for the Norwegian economy are supportive of the NOK at this stage. Growth is solid, the oil price is again closing in on USD 80/bbl and Norges Bank has signaled that the first hike since 2011 is right around the corner.”

“Still the NOK has failed to strengthen noteworthy, especially towards the EUR. This leads us to hike our EURNOK forecast.”

“We see the weakness in the NOK to a large degree driven by low Scandi appetite and negative spill-overs from the SEK.”

“Looking to the future monetary policy tightening from Norges Bank is the underlying driver behind our forecast of a stronger NOK. Beyond the hike in September this year we pencil in three more rate hikes in 2019 and 2020. This is on the aggressive side compared to current market pricing.”

“Carry trades can again be on the table as short interest rate differentials (NOK vs EUR) will be the highest in sixteen years by the summer of 2019.”

“Monetary policy divergence between Norges Bank and ECB will be the greatest during the first half of 2019. Much of the expected NOK strengthening will therefore come towards the summer. As ECB starts hiking rates in the second half of 2019 the NOK strengthening should slow and eventually halt.”