NOK: Time for a comeback? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank suggests that while domestic fundamentals indicate modest upside potential for the NOK vs. the EUR, the extent to any gains will be moderated by the performance of the oil price. 

Key Quotes

“From its 2016 peak, the unemployment rate has trended lower to a lower than expected 4.3% in May.  Several other recent measures of economic activity have also surprised on the upside.  These include the July manufacturing PMI and CPI inflation which registered 1.5% y/y.  Anecdotal evidence suggests that tourism is strong on the back of the sharp depreciation in the value of the NOK since 2014.  While housing data are soft, this is a response to stringent macro-prudential measures put in place to cool the market after years of overheating.”

“At its last policy meeting in June the Norges bank already concluded that “capacity utilisation in the Norwegian economy appears to be higher than envisaged earlier”. That said, it also noted that “inflation is lower than expected and may continue to drift down in the months ahead” even though ”increased activity and receding unemployment suggest that inflation will pick up”.  The central bank’s guidance on policy was that “the balance of risks suggests that the key policy rate will remain at today's level in the period ahead" and its suggested that the key policy rates would remain at 0.5% in 2017 and 2018, “rising gradually from 2019".  The Norges Bank’s next policy meeting is scheduled for September 21.  While the gains in inflation are likely not strong enough to justify any significant shift by the Norges Bank, in view of the strengthening in world growth and the relative weakness of the NOK, a modest uptrend in inflation could be noted by the central bank.  This would likely be interpreted as a NOK supportive factor.”

“While domestic fundamentals indicate modest upside potential for the NOK vs. the EUR, the extent to any gains will be moderated by the performance of the oil price.  The rally in the price of oil through July was supportive for the NOK.  Any significant shift in the price of Brent below the USD50 /b level will likely damage the prospects of further upside in the value of NOK near-term.  We are forecasting EUR/NOK to move back towards its recent lows in the 9.25 area around year end.”