USD/NOK: A hawkish FED gives summertime sadness for the Norwegian krone – Nordea

The Norwegian krone has weakened markedly against both the euro and the US dollar as hawkish Fed surprised markets, shattering reflation trades such as being long NOK. NOK is likely in store for summertime sadness, but economists at Nordea remain optimistic on behalf of NOK towards year-end.

NOK is not attractive now due to a low NIBOR, but this will change from August onwards

“Over the summer, the risk is for a somewhat weaker NOK – especially against the USD – if US figures come in better than expected and inflation surprises yet again on the upside. Key to watch will be Nonfarm Payrolls and inflation prints. If these surprise positively, markets will start betting that the Fed will become even more hawkish. This will likely be good news for US rates and USD, but bad news for stock markets and thereby NOK.”

“Yet, we remain positive on NOK towards year-end. We expect NOK to start performing again when NIBOR rises as we come nearer to Norges Bank’s September hike. The reason behind the lower NIBOR is much better structural liquidity in the NOK market, but this will change after the summer. Lower liquidity should push NIBOR higher towards year-end. Moreover, Norges Bank’s September hike will push NIBOR even higher, thereby supporting NOK. This means that the current headwind for NOK from a lower NIBOR will turn to tailwinds in a couple of months’ time.”

“Higher rates in Norway is why we hold our view that EUR/NOK will come down below 10 by year-end. But the same cannot be said for USD/NOK, we still believe USD/NOK will trade relatively sideways towards year-end.”

“USD/NOK is currently trading near the 200-day moving average at 8.70, which should be a solid resistance level. But if sentiment sours even more, then we could be in line for movements all the way up to 9.00.”

“For EUR/NOK, there is a solid resistance level near the 200-day moving average at 10.40.”