NOK: Consolidating gains after the re-pricing - ING

After the stellar year of 2016 (NOK was so far the second best performing G10 currency, only surpassed by JPY), Petr Krpata, Chief EMEA FX and IR Strategist at ING, expects NOK to consolidate its gains in 2017.

Key Quotes

“Upside to NOK should be more limited compared with SEK, thus suggesting short NOK/SEK positions.”

“First, unlike for SEK, the valuation correction from the overly cheap levels has already happened for NOK (EUR/NOK entered 2016 with the largest overvaluation since the Great Financial Crisis) and EUR/NOK is currently close to its medium-term BEER fair value.”

“Second, unlike Riksbank, Norges Bank has already undergone a shift in monetary policy stance from overly dovish to neutral (as evident in the new Norges Bank interest rate forecast, which now assigns a low probability to a 25bp rate cut). As long as oil prices remain stable, the scope for further Norges Bank easing is limited (the past sharp decline in oil prices in 2014-15 and its negative spill-over into the Norwegian economy was one of the key reasons behind Norges Bank easing in the past).” 

“However, the shift in Norges Bank’s policy stance is already in the price, meaning the upside to NOK from the monetary policy channel should be very limited. Unless oil prices rise meaningfully (not our base case), we look for a modest and gradual EUR/NOK decline towards the 8.80 level. We prefer being short NOK/SEK, targeting 1.04.”