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Sell GBP/NOK, target 10.40

Thu, Feb 7 2008, 10:53 GMT
by John Hydeskov

Danske Bank A/S


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    We recommend selling GBP/NOK spot (10.69) for a move to 10.40 and with a stop at 10.85. We foresee serious challenges for the UK economy and expect the Bank of England (BoE) to be forced to cut rates more than currently anticipated in the markets on the back of deteriorating domestic conditions and despite inflationary pressures. We remain relatively bullish on the Norwegian economy and the solid wage growth, high underlying inflation and rising rents make us believe that the Norges Bank (NB) will move to raise rates again during the spring.

    Major events to watch for from Norway are January’s underlying CPI released on 11 February, expected to rise to 2.1%-2.2% from 1.8% in December, and the annual address from Governor Svein Gjedrem on 14 February at the meeting of the Supervisory Council of NB. We expect both events will provide support to NOK, as the strong inflation figures will give the NB basis for a rate hike to 5.50% in the short term and the Governor in his speech can rule out any rate cuts later in the year. In the UK, we expect the BoE to lower the base rate by 25bp at the meeting on 7 February. This is almost a ‘done deal’ in the market. However, we expect the central bank to deliver a dovish statement and open the window wide for more cuts. UK CPI figures, to be released on 12 February, should not rise too much and thereby shift focus from growth to price stability. House price figures and the effect of the credit tightening will be key for UK monetary policy in the coming months.

    Our S/T model suggests that GBP/NOK fair value is currently around 10.50. However, our combined 3- 6M forecasts convince us that the pair could go much lower, possibly towards 10.00, which is also supported by the technical trend. GBP/NOK has recently been highly correlated with in particular, performance of the UK financial companies and the OBX index (cf charts).

    We also sold GBP/NOK in late December 2007 at 10.90 and took profit at 10.40 (+4.81%).

    Published on  Thu, Feb 7 2008, 11:04 GMT


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