NOK: Best performer? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, points out that the NOK is the best performing G10 currency in the year to date and a significant source of support was the surprise change in the Norges Bank’s forward guidance in December. 

Key Quotes

“Consequently its January 25 meeting will be closely watched for fresh policy clues.  It is also possible that the rally in the oil price is providing some support to the currency, though the correlation between oil and USD/NOK, which has been strong in the past, fell apart through much of 2017.”

“In December the Norges Bank surprised the market by signalling that “the changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the September”.  Specifically the Norges bank signalled that the key policy rate “is forecast to remain at 0.5 percent in the period to autumn 2018, followed by a gradual increase”.  This was despite the acknowledgment that spare capacity existed in the Norwegian economy and the central bank’s prediction that “inflation will remain below 2.5% in the coming years”.  One of the key reasons for the change in tone from the Norges Bank appeared to be the NOK and the risk that “a weaker krone than expected in September may lead to a faster rise in inflation than forecast earlier.”  Although the NOK has reclaimed some ground since then, the release of stronger than expected December CPI inflation data appears to have validated policy makers’ concerns.”

“In December, Norwegian CPI inflation data registered a stronger than expected 1.6% y/y.   Underlying price pressures also ticked higher to 1.4% y/y.  Going forward, stronger growth and falling capacity utilisation strengthen the case for a Norges Bank rate hike this year.  However, the better tone of the NOK and weakness in the housing market suggest that the central bank is still likely to maintain a cautious outlook.”

“While the stronger CPI data release earlier this month provided a boost to the NOK, we currently see little risk currently of the Norges Bank bringing forward rate hike risk from the end of 2018.  Therefore we expect the pace of the NOK’s recent outperformance to slow.  We see risk of EUR/NOK trading a range in the 9.60 region on a 6 mth view and headed towards 9.40 on a 12 mth view on the assumption that the Norges embarks on a slow cycle of policy tightening later in the year.”