NOK: Challenging externals dominating domestics – Danske Bank

Global factors have weighed on the NOK and analysts at Danske Bank do not expect this to reverse near term but they still expect domestic factors to come in play in H2 17.

Key Quotes

“We see EUR/NOK at 9.30 in 1M, 9.30 in 3M, 9.10 in 6M and 9.00 in 12M.”

“Activity data has continued to paint an upbeat picture of the Norwegian economy with headwinds fading in the petroleum industries, manufacturing production stabilising and private consumption benefiting from higher real wages. Inflation remains subdued below Norges Bank’s (NB) forecast but Easter effects have blurred the latest prints, making the May print (due in June) key ahead of the next monetary policy meeting. The housing market has shown clear signs of cooling off, which is not least down to the introduction of a much tighter loan-to-income requirement this year.”

“As widely expected, NB left rates unchanged at the May meeting, stating that the balance of risks ‘does not appear to have changed substantially since the March report’. The more detailed assessment also indicated minor changes since the March meeting, with NB pointing out some factors arguing for both a higher and a lower rate path. The rate path suggests a 40% probability of a rate cut, but we still interpret this as an ‘insurance premium’. Based on the recent improvement in capacity utilisation and the NOK depreciation, we expect these risks to gradually abate and expect unchanged policy rates. We pencil in the first rate hike around end-2018.”

“Our risk scenario for the NOK as a much improved domestic story has been dominated by global commodity weakness weighing on G10 commodity currencies in a remarkably synchronised move. It is difficult to identify any imminent triggers for a NOK turnaround, as global business cycle weakness will remain a NOK challenge, while NB is unlikely to turn hawkish in June. Also, we think the latest oil price rise reflects that markets have once again close-to-fully priced in an extension of an OPEC output freeze agreement. The Norwegian normalisation story, valuation and real rates remain clear NOK positives but the positive effects will likely be a H2 17 story.”