NOK: Guided by the Norges Bank - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, this morning’s release of weak Norwegian February retail sales data (-0.6% m/m) has shaken market forecasters as the view that the Norges Bank will hike around September 2018 prevails, but the next set of economic data will be particularly important if this view is to be maintained.

Key Quotes

“Following the hawkish signals of the Norges Bank in December, the NOK is the second best performing G10 currency in the year to date after the safe haven JPY. Since the middle of this month, however, profit-taking on long NOK positions has lifted EUR/NOK off its recent low and today’s weak data release has pushed EUR/NOK back to levels traded at the start of March.”

“The February retail sales release is not the only data disappointment over the past month. The January retail report was also sluggish as was January production release and the Q4 wage index which rose by a modest 0.1% q/q.  The weakness of wage inflation is likely a contributing factor to the recent soft performance of the retailing sector.”

“A lack of wage inflation could prove to be a hurdle for Norges Bank hawks going forward as could the outlook for fiscal policy. Against the backdrop of an improving economy, the Norwegian government has indicated it will show more fiscal restraint going forward.”

“A more restrained fiscal position and modest wage growth suggest that the pace of rate changes at the Norges Bank is likely to be moderate. This suggests that upside potential for the NOK vs. the EUR is likely to be contained. Broadly speaking, the Norges Bank is very sensitive to the outlook for its currency given the potential dampening impact of a strong currency on exports and growth.  However, its import weighted krone is currently holding at a very subdued rate and is therefore is posing little obstruction to a firmer policy.”

“Despite the disappointments of some data releases recently the February CPI inflation release surprised on the upside, at 2.2% y/y for the headline release and 1.4% y/y for the underlying number. For now, this leaves the Norges Bank on course for a rate hike in H2.  However, the market is likely to be highly sensitive to the next round of economic data.  For now we retain a 3 mth target of EUR/NOK 9.40, though this assumes that the Norges Bank retains it hawkish position.”