Diverging Nordic Rates Outlook May Leave Krone Bears Offside

Traders may be betting on the wrong Scandinavian currency if the rates outlook in the region is anything to go by.

Norway’s central bank could indicate a faster pace of tightening as early as this week, according to strategists at Nordea Bank and SEB. Yet one-year risk reversals -- a measure of sentiment and positioning -- clearly favor the Swedish krona, even as policy makers there have indicated they will hold rates steady for the foreseeable future.

The bearish slant is also seeping into economist expectations, with the median estimate of analysts penciling in a more than 2% depreciation in the krone against its Swedish peer this year. And it suggests the market may get caught on the wrong foot if Norges Bank paints a more positive-than-expected picture of the economy when it sets policy Thursday.

Diverging Nordic Rates Outlook May Leave Krone Bears Offside

“Any indication in the March 18 policy meeting that the Committee is starting to waver on its commitment to policy accommodation is likely to see the NOK lurch higher,” Rabobank’s senior FX strategist Jane Foley wrote in a note to clients last week. She expects the krone will hit “fresh cycle highs” versus the Swedish krona in the coming months.

Higher oil prices and faster-than-expected vaccine rollouts have helped drive the krone just above the psychologically important level of 1.00 against the Swedish currency. Yet despite the rally, it’s still trading well below a high of 1.05 seen before the pandemic.

Diverging Nordic Rates Outlook May Leave Krone Bears Offside

The market is currently pricing a little more than a 30-basis-point increase through December, according to Nordea analysts. They expect the central bank will raise rates twice this year, followed by a further three hikes in 2022.

“For rates, what Norges Bank does is key and market participants can adjust their expectations quickly,” the analysts including Dane Cekov wrote in a note Monday. “So long as equities and oil prices hold their ground,” a hawkish message could easily lead the krone above 10.00 per euro this week, the highest level since January 2020, they said.

HSBC on Tuesday changed its year-end forecasts for the euro-Norwegian krone to 9.40 and to 9.80 for euro-Swedish krona, after earlier forecasting both at 10.00. It says the Norwegian currency stands to benefit more than its Swedish peer given the diverging rates outlook.

“The robust growth backdrop and incoming rate hikes are likely to be supportive of the Norwegian krone in the near future” analysts lead by Paul Mackel wrote in a note. “Any increasing expectations of the Norges Bank hiking earlier and faster will only play into Norwegian krone strength.”

©2021 Bloomberg L.P.

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