NOK: Lagging the ECB? - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, Norges Bank could lag other G10 central banks in normalising policy settings over the coming year or two, which could increase upside potential for currencies such as the EUR and the SEK vs. the NOK.

Key Quotes

“In recent years the weakness of oil prices has had a clear and dramatic impact on the Norwegian economy.  This year, however, the economic backdrop has been brightening.  Even so, the Norges Bank judges that capacity utilisation is still below ‘normal’ levels and that inflation will range between 1% and 2% in the coming years, below its operational target of close to 2.5% over time.  In its policy assessment on June 21, the Norges Bank also judged that the key policy rate will remain at the record low of 0.5% ‘in the period ahead’.  The implication is that the Norges Bank could lag other G10 central banks in normalising policy settings over the coming year or two.  Technically this could increase upside potential for currencies such as the EUR and the SEK vs. the NOK.  However, the NOK will continue to be heavily influenced by the direction of oil prices.”

“In recent weeks the market has been speculating that central banks including the ECB, BoC and BoE could be on the cusp of tightening policy.  Less accommodation from the ECB could increase the likelihood that the Riksbank, DNB and SNB follow suit.  Currently it seems likely that the Norges Bank could be a laggard. That said, the economic outlook has improved in Norway.”

“In its May budget update the Norwegian government confirmed that it will tap less of the country’s sovereign wealth fund during this fiscal year then it had forecast in September.  The estimate has dropped to NOK220.8 bln from NOK225.6 bln.  This better outlook was based on a faster than expected drop in unemployment and a better pace of growth.  Mainland GDP (which excludes the energy sector) is expected by the government to expand at a pace of 1.6% in 2017 and 2.4% in 2018.  This compares with a sluggish pace of expansion in 2016 at 0.8%.  Unemployment is expected to drop to 4.1% in 2018 from 4.7% in the current year.  Although the recent IMF report concluded that the rebalancing of the economy towards the non-oil sector remains incomplete, these forecasts suggest that progress has been made.”

“Over the past month the releases of June industrial production data at 1.6% m/m, the better than expected June manufacturing PMI reading at 55.1 and the 1.3% m/m surge in May retail sales all add to the picture of an improving economic backdrop.  That said, CPI inflation data has remained benign.  The next Norge Bank policy meeting in September looks likely to bring an upgraded economic outlook.  However, it would appear too early for the Norges Bank to step away from its record low interest rate policy.  On the assumption that upside potential for oil prices remain contained and based on our view that the ECB will taper its QE programme next year, we have revised up our forecasts for EUR/NOK to 9.70 on a 12 mth view.  We are forecasting that NOK/SEK will drop towards 0.96 by the middle of next year.”