NOK: Robust to euro strength

The krone was hurt during the first half due to strong euro appreciation, but the currency partly recovered over the summer and should keep its bullish bias in the months ahead on the back of the strong economic context in Norway, according to Olivier Korber, Research Analyst at Societe Generale.

Key Quotes

“Like the CAD, we expect the oil-sensitive NOK to stay fairly stable next year.”

“Flexible inflation targeting in action. Norges Bank is likely to keep its status quo despite collapsing inflation. The central bank is facing a conundrum, as CPI falls below 2% (target is 2.5%) for the first time since 2013. The statement of the June policy meeting expected inflation to continue to drift lower, but policy was not changed as improving activity and employment was supposed to ultimately generate inflation. Indeed, the unemployment rate remains extremely low (lastly 2.7%) and the PMI has surged since the start of the year to reach the 2010-2011 peak this summer. The tightening job market should support wage growth if activity continues to be robust. Governor Olsen said in June that he sees “no major danger” of deflation, and was fine with only 1-2% inflation provided that expectations remain anchored. All in all, the background of strong activity prompts the central bank to be more relaxed regarding the inflation targeting framework.”

“NOK/SEK to move towards parity. Inflation rates in Sweden and Norway are moving apart, with the former surging and the latter cooling. This will continue to pressure the NOK/SEK in the months ahead. Since the Riksbank announced QE in early 2015, the cross has been driven by relatively short rates. Contrasting inflation paths and the growth differential in favour of Sweden should guarantee that Norges bank will lag in the monetary policy normalisation process. Swedish rates are therefore likely to gradually increase faster than in Norway, maintaining the NOK/SEK’s bearish orientation.”

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