Danske Research Team
Danske Bank A/S
Norges Bank FX transactions statistics released today show that foreign banks (proxy for speculative flows) net sold NOK 3.2bn in the Norwegian currency last week. The net selling primarily reflects how Norges Bank surprised markets on 24 September by cutting the sight deposit rate by 25bp to 0.75% whilst signalling a high probability of another cut (for more details see Norges Bank Review: a 25bp cut and an easing bias). As figure 1 shows, it was the first time in five weeks that banks net sold the Norwegian currency after a post-summer period of short covering.
Importantly, the chart shows that, while the NOK weakened significantly on the Norges Bank’s announcement, the net selling was actually very limited from a historical perspective (chart 1). Indeed, according to our microstructure model on FX flows, the weakening of the NOK was considerably greater than what a historical/statistical relationship would suggest (chart 2). According to the model, the import-weighted NOK (the index Norges Bank projects) should have weakened by just 1% due to the selling pressure during the week and not by the actual 3%.
In our view, the move higher in the I44 reflects further considerable widening of the NOK liquidity- and risk-premium as markets have priced a ‘ Norges Bank uncertainty’ premium into the NOK. This has contributed to sending the I44 index to the highest level ever recorded (since 1989). While a tightening of this risk premium together with overall stretched short speculative positioning should eventually become a NOK positive when the business cycle turns, we still expect the NOK to trade around the current weak levels in the months ahead. We target EUR/NOK at 9.40 in 1M, 9.40 in 3M, 9.25 in 6M and 8.80 in 12M.
Importantly, the chart shows that, while the NOK weakened significantly on the Norges Bank’s announcement, the net selling was actually very limited from a historical perspective (chart 1). Indeed, according to our microstructure model on FX flows, the weakening of the NOK was considerably greater than what a historical/statistical relationship would suggest (chart 2). According to the model, the import-weighted NOK (the index Norges Bank projects) should have weakened by just 1% due to the selling pressure during the week and not by the actual 3%.
In our view, the move higher in the I44 reflects further considerable widening of the NOK liquidity- and risk-premium as markets have priced a ‘ Norges Bank uncertainty’ premium into the NOK. This has contributed to sending the I44 index to the highest level ever recorded (since 1989). While a tightening of this risk premium together with overall stretched short speculative positioning should eventually become a NOK positive when the business cycle turns, we still expect the NOK to trade around the current weak levels in the months ahead. We target EUR/NOK at 9.40 in 1M, 9.40 in 3M, 9.25 in 6M and 8.80 in 12M.
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