NOK bullish in the longer run – Danske Bank

Jakob Christensen, Chief Analyst at Danske Bank, keeps the bullish view on the Norwegian Krone in the longer term horizon.

Key Quotes

“Following yesterday’s meeting EUR/NOK has fallen but the downside was as expected limited by the flatness of the rate path”.

“Going forward, we emphasise that the global environment remains a headwind for the NOK. Hence, we do not see the NB meeting as a trigger for a sustained EUR/NOK trend lower – not least, the near-term oil price outlook seems challenging with markets focusing increasingly on weak demand amid OPEC losing its market influence (key for our cautious stance since early March)”.

“Today’s release of the Gjedrem report in Norway could contain a recommendation to lower the inflation target from 2.5% to 2.0%. If it happens, it would be a natural next step relative to the structural change of the Norwegian economy relative to peers; most recently reflected in the proposal to lower the use of oil money from 4% to 3% of the petroleum fund. An argument against lowering the target is the central bank’s ability to cut the real rate at a time when the nominal rate is close to the lower bound… What should it mean for the NOK? On balance, it would mean that NB should keep monetary conditions accommodative for a shorter period of time. This would mean a steeper FRA curve and a stronger NOK”.

“However, looking at NB’s revised inflation forecast it is clear that a change would NOT lead to an urged tightening need as NB does not even expect inflation to move above 2.0% during the whole of the bank’s projection period. As a result, a change in the inflation mandate would increase the market sensitivity to positive inflation surprises going forward but is unlikely to drive a significant NOK-appreciation near term”.

“In summary, we are strategically NOK-bullish on constructive domestics but remain tactically cautious on global demand and the oil price outlook even if the Gjedrem report could add temporary support. We prefer to position for a lower EUR/NOK via options”.