FX strategies: NOK Strengthening trend intact but the risk

FX strategies: NOK
Undervalued, but oil is a drag
16 March 2017 15:57
Marketing communication
Klaus Dalsgaard, Chief Strategist, [email protected], +45 44 55 18 10
16 Mar Jul-17 Oct-17 Jan-18 Apr-18
Technical resistance points
9.192 => 9.255 => 9.517
Technical support points
8.835 => 8.78 => 8.31
Trend (EUR/NOK)
Short term: NOK weakening
Medium term: Downward trend channel since early 2016 under
Long term: Upward trend since 2012 under pressure
Source: Nykredit Markets
Excessive NOK weakening in the short term
Source: Macrobond, Bloomberg
In the longer term, we see moderate NOK strengthening
Source: Macrobond, Bloomberg, Nykredit Markets
We are long-term buyers of NOK. We recommend hedging
NOK-denominated income asymmetrically at the current levels.
Conversely, both the levels and the forward discount favour
forward hedging of expenses on all horizons.
NOK weakening overdone
Our asymmetrical risk profile on NOK (weaker NOK) from the
last FX strategies has played out over the past month during
which the NOK has weakened by approx 4%. Lower oil prices,
weaker growth/inflation signals and today also a downward
revision of the rate path from Norges Bank are the primary
reasons for the decrease. We find the weakening somewhat
overdone in the short term and rather forecast EUR/NOK at the
lower half of the 9.00-9.20 range in the coming period. The
weakness of OPEC's oil output limit is that Saudi Arabia carries
too much of the implementation burden. At the same time we
are seeing increasing production in the US and OPEC countries
not covered by the deal. Brent has dropped from the previous
range of USD 53-57 per barrel. The correlation with the NOK is
not perfect, but all other things being equal, a fall in the oil
price typically leads to NOK weakening. In the short term,
OPEC may try to promote the credibility of the agreement
before the OPEC meeting in late May (extension to be agreed
then). Core inflation as well as a number of forward-looking
growth indicators have been somewhat weak lately. Therefore,
Norges Bank has through its rate path signalled 1) probability
of a rate cut in the coming year, and 2) deferral of a first rate
hike until 2019. However, the current distinct rise in property
prices in Oslo may quickly make it an issue once again for the
central bank to deal with. We will not have to wait until 2019
to see the first rate hike.
Moderate long-term strengthening
We are moderately positive on the NOK in the long term, and
we have an early 2018 forecast of EUR/NOK at 8.80 (NOK/DKK
at 0.847). The domestic economic recovery may rekindle concerns about renewed overheating of the housing market, and
in the long term, interest rate hikes may be announced sooner
than in the euro area, if oil investments start rising again. We
do not expect any interest rate changes within the coming
year, however. The same applies for the ECB, which is expected, however, to signal additional purchase programme
tapering in September. Interest rate spreads are therefore still
working to the NOK's advantage. The NOK is about 10% weaker than the long-term average, offering a strengthening potential, unless oil prices are permanently locked at very low levels.
Lower costs in the North Sea makes the Norwegian economy
more resilient, but the long-term challenge is to lift competitiveness for sectors other than oil and gas. We therefore do not
expect the NOK to return to previous levels – 15-20% above
the current level.
This research is a marketing communication and constitutes non-independent research prepared by Fixed Income & Macro Research
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