Norway May Raise Rates, But Krone May Take Move in Its Stride
(Bloomberg) -- Expectations for Norway to increase interest rates on Thursday couldn’t be any higher, but don’t expect the krone to benefit that much.
The currency touched a one-month high on Tuesday on speculation that Norges Bank will not only raise rates for the first time since 2011, but also flag a faster pace of tightening. However, while the krone may receive a boost, any rally may be contained as a tighter stance is already priced in by markets, most analysts say.
“While Norges Bank could continue to provide some short-term support for the krone given current positioning, we doubt the central bank’s outlook can push the EUR/NOK significantly below recent lows,” said Magne Ostnor, a strategist at DNB ASA in Oslo.
The Norwegian central bank is expected to raise its policy rate by 25 basis points to 0.75 percent by all analysts in a Bloomberg survey.
The krone has gained 2 percent versus Europe’s common currency this month, the best performance among Group of 10 peers. It was trading at 9.5364 per euro as of 3:39 p.m. London time on Tuesday after earlier touching 9.5319, its strongest level since mid-August.
Still, the median analyst estimate is for the krone to advance less than 1 percent and end this year at 9.45 per euro.
Here’s what a selection of investors and strategists are saying ahead of the decision:
- The krone remains vulnerable toward setbacks in risk sentiment, but improving growth, future monetary policy tightening and a current low valuation suggest that NOK should strengthen against other G-10 currencies over a six-month horizon, according to strategist Erica Blomgren
- Forecasts a gradually stronger NOK with EUR/NOK trading at 9.45 in 1Q 2019
- Focus will be whether policy makers signal two or three hikes in 2019
- Developments since June point to the latter, but expect the bank’s cautious approach to limit the upward revision; expect path to signal a second hike in January or March 2019. The long end of the path is expected to be lifted by some 5-10bps implying a key rate of 2.35% by end-2021
- Norges Bank hiking rates is an important fundamental trigger for the next leg lower in the overvalued EUR/NOK, analyst Kristoffer Kjaer Lomholt says
- In June, Norges Bank said a much stronger NOK is now justified, suggesting the currency has gone from being an argument against rate hikes to an argument for faster hikes
- Targets EUR/NOK at 9.40 in one month, 9.20 in three months, 9.20 in six months and 9.10 in 12 months
- Norges Bank will hike by 25bps and revise upward its interest-rate forecast to suggest two to three hikes in 2019, analysts including Ostnor say
- While a re-pricing of Norges Bank could take EUR/NOK down to the lower end of this year’s trading range amid a stretched short krone positioning, a weak risk sentiment will likely trump strong fundamentals, keeping the krone firmly on the back foot
- DNB forecasts EUR/NOK at 9.60 in one month, 9.50 in three months and 9.30 in 12 months
Nordea Bank AB
- Expect Norges Bank to keep a 50% probability of an additional hike in December, with the path signalling almost four more hikes before year-end 2019 compared to a little less than three currently, economist Erik Bruce says
- If the central bank removes the probability of a December hike but still adds one hike in 2019 the market outcome is more uncertain; December FRA could drop slightly, but it’s possible that the upward revision to 2019 will mean somewhat higher longer forward rates and stronger NOK
- Nordea sees EUR/NOK at 9.50 by year-end, 9.15 by mid-2019 and 9.00 by end-2019
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