DB FX Daily: NOK Finally Comes Alive NOK Finally Comes Alive

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FX Daily: NOK Finally Comes Alive

NOK Finally Comes Alive

We have been consistent advocates of NOK appreciation since the start of the year, based on the steady tightening cycle of the Norges Bank. We have argued that even though the rates story is almost fully priced, the NOK could still benefit from anticipated central bank moves as the risk premium around the projected rate path is removed and inflows more sensitive to the realised, rather than expected path of yields increase.

More recently, we have also argued that the oil price backdrop has become steadily more supportive, with the close to 4% strength in WTI oil prices this month allowing EUR/NOK to break through 8.00 yesterday and 7.97 today. Looking at the correlation between crude oil and EUR/NOK, the first chart at left shows that movements in oil prices have been growing in importance this year, suggesting that strong oil prices are likely to remain a considerable source of support to the NOK in the short-tem. The strength of G10 carry is also providing an added impetus, with EUR/NOK increasingly correlated to G10 carry trades and global equities over recent months. In terms of rate differentials, the recent move lower has not been accompanied by a corresponding widening in rates in favour of the krona, which would make us more cautious in the short-term and point to oil prices and global risk appetite remaining as the two key sources of support over coming days.

Looking ahead to next week's Norges Bank meeting, this will be a greater than usual event risk as it will be accompanied by the publication of the bank's quarterly inflation report. Our economist expects the bank to stick to its path of measured tightening, with the potential of an upward revision to the bank's rate path for this year to a 5.00% rate from 4.75% currently (this would require three more rates hikes after next week's meeting from the current two). Independently of the outcome, the experience from April's meeting when the central bank failed to confirm market expectations of a rate hike without a corresponding sell-off in the NOK, points to the appeal of a currency with a central bank in the midst of a steady tightening cycle. With some sizeable tightening from Norges Bank still left to go, we continue to see further downside potential in EUR/NOK for the remainder of the year.