As widely expected, Norges Bank (NB) this morning raised policy rates by 25bp taking the sight deposit rate from 1.00% to 1.25%. The rate path was marginally adjusted upwards at the short end and marginally downwards at the long-end (chart 2). The message is clearly hawkish as a strong domestic business cycle suggests a further frontloading of monetary tightening despite elevated international uncertainty at present.

fxsoriginal

 

The executive board concluded that the ‘...current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of 2019'. The rate path implies a 70-80% probability of that hike coming in September. While NB has previously cautioned against over-interpreting the implied probabilities the press conference did confirm that the board wanted to signal September as the most likely time for the next rate hike. The long-end of the rate path was lowered marginally to 1.67% (from 1.73%). This falls within NB's estimate of the neutral sight deposit rate of [1.60%-2.60%]. Overall the rate path therefore suggests another hike in 2019 and a roughly 70% probability of a second additional hike – most likely in 2020.

According to NB's assessment underlying inflation is a little higher than the target. Capacity utilisation is somewhat above normal levels and has been underestimated by NB. The upturn in the Norwegian economy is somewhat stronger than earlier projected despite elevated global uncertainty which Olsen emphasised as the largest risk factor for NB. Generally the economic projections had few surprises (see appendix). We share NB's view on the Norwegian economy going forward. We now expect NB to hike the sight deposit rate again by another 25bp at the 19 September board meeting. We acknowledge the drop in foreign rates since Friday (the deadline of the MPR) but still think September is more likely than December. For 2020 our base case remains another 2 hikes.

FI/Rates. We have argued for buying short-end FRAs outright. In light of today's sight deposit rate hike and the new rate path we reiterate these strategies. There should still be upside potential in NOK FRA 3M SEP19 and DEC 19 – despite today's jump in DEC 19 of 8bp. The current inverted FRA curve from the start of 2020 going forward is in stark contrast to the NB's rate projection. In the current international environment it may be premature to add steepening strategies in the red and green NOK FRAs. The hawkish NB relative to international peers and the downward pressure in international interest rates may trigger a renewed interest for long-end NGBs. We therefore reiterate our strategy for a flattening of the Norwegian yield curves.

FX. EUR/NOK moved sharply lower upon announcement triggering profit taking in the 9.67-9.69 range. Strategically, we still like to be long NOK. In FX Strategy – Why is the NOK so weak?, we argued that some of several explanations for the NOK decoupling from the relative rate over the last year has been A) the global environment and B) pivotal carry in the sense that the NOK has been ‘carry-dominated' by Triple-A commodity alternatives in CAD, AUD and NZD. With yesterday's FOMC message A) is set to become much more supportive for the NOK going forward. In addition with the NB's message the NOK carry will now catch-up up making the NOK increasingly attractive to buy relative to B). We expect a stronger NOK in the coming months and remain short USD/NOK and AUD/NOK.

 

Download The Full Norges Bank Review

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Analysis feed

Latest Forex Analysis

Editors’ Picks

USD/JPY extends the bounce above 108.50 on rising trade deal hopes

The USD/JPY pair extends its bounce from eight-day lows of 108.25 in Friday's Asian trading, with the bulls regaining control above 108.50 after White House Economic Adviser Kudlow's comments bolstered US-China trade deal hopes. 

USD/JPY News

AUD/USD looks to regain 0.6800, trade optimism underpins

With the latest trade positive comments from White House Adviser Kudlow, AUD/USD seems to have picked up a delayed bid, now testing the 0.68 handle. The spot extends its recovery from monthly lows of 0.6769. 

AUD/USD News

USD/JPY extends the bounce above 108.50 on rising trade deal hopes

The USD/JPY pair extends its bounce from eight-day lows of 108.25 in Friday's Asian trading, with the bulls regaining control above 108.50 after White House Economic Adviser Kudlow's comments bolstered US-China trade deal hopes. 

USD/JPY News

US Dollar Index: DXY suck at monthly highs near 98.40 level

DXY (US Dollar Index) is trading in a bull trend above the main daily simple moving averages (DMAs). This Thursday the Greenback is once again challenging the 98.40 level while trading just above the 50 DMA.

US Dollar Index News

WTI testing offers near $ 57 amid trade optimism, ahead of US data

WTI is looking to extend the overnight bounce above the 57 handle, as the bulls find some solace from the renewed US-China trade optimism after both trade teams agreed to meet over trade talks later on Friday. 

Oil News

Forex Majors

Cryptocurrencies

Signatures