USD/NOK: Norwegian Krone has become deeply undervalued – MUFG

Analysts at MUFG Bank point out the Norwegian Krone could rebound after a heavy sell-off. They have a trade idea of shorting USD/NOK at 10.620, with a target at 10.150. 

Key Quotes: 

“The NOK has become deeply undervalued and out of line with short-term fundamental drivers such as the price of oil, investor risk sentiment and yield spreads. The Norges Bank has signalled greater sensitivity to NOK weakness at this week’s policy meeting. If NOK weakness persists, it will encourage the Norges Bank to hike rates further than planned. The Norges Bank is already planning to keep hiking rates in June while we are more confident that the Fed has reached the end of their hiking cycle after this week’s FOMC meeting.”

“The ongoing loss of confidence in US regional banks and US debt ceiling stand-off should deter the Fed from further hikes in the coming months. Yield differentials between Norway and the US should narrow further weighing down on USD/NOK.”

“The main risk to our trade idea is that our timing could be too early to establish NOK longs in anticipation of a more sustained rebound.”

“With the USD having peaked out more broadly, we expect the October high for USD/NOK at around the 11.000-level to hold.”