NOK: Still looking good? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that for much of this year the NOK has been holding at the top of the leader board in terms of the performance of G10 currencies and measured since the beginning of 2018, the NOK has gained around 5.8% vs. the USD and about 8.7% vs, the SEK which is the worst performing currency in the G10 universe this year. 

Key Quotes

“The NOK’s gains vs. the EUR has been a more measured 3%.  It is clear that the NOK is responsible to a tangible tightening in monetary conditions in recent months.  This is not something which is set to worry the Norges Bank unduly since the value of its import weighted krone is still fairly soft relative to historical levels.  In any case the Norges Bank sees upside risk to inflation.  In a speech yesterday Norges Bank Governor Olsen says that inflation is on its way to gradual improvement and reiterated the view that the first rate rise is likely after the summer this year.”

“The central bank appear to be more optimistic. In his speech yesterday Olsen forecast that wage growth will move up to the 3% area.  This forecast strengthens the view that the Norges Bank will embark on a period of policy tightening in the second half of the year.  However, there is another good reason to expect the Norges Bank to be cautious with the pace of rate rises.  Yesterday Olsen referred again to the high level of household debt in the country and warned that this can amplify the effect of rate rises.”

“Earlier this year Olsen complained that Norway was one of several small economies that “imported low interest rates and experienced rapidly rising house prices and debt” as a consequence of the global financial crisis.  He stated that 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 react by slowly reducing policy accommodation. We remain positive on the outlook for the NOK vs the EUR and see risk of a move towards EUR/NOK9.45 on a 3 mth view.  That said, with the Riksbank also signalling that it could hike rates later this year, we see modest downside potential for NOK/SEK in the coming weeks.”