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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