EUR/NOK downside still favoured – Danske Bank

Analyst at Danske Bank Mathias Mogensen expects the Norwegian Krone to appreciate in the longer run.

Key Quotes

“The Gjedrem report released on Friday did not include any new regulation regarding Norwegian monetary policy (i.e. inflation target remains 2.5%) but its proposals suggest that the central bank’s mandate will remain that of flexible inflation targeting, albeit the target could indeed be lowered (e.g. to 2.0%) as many market participants have been anticipating”.

“In addition, the report suggests that the Government Pension Fund Global (i.e. Norwegian SWF) is organised outside of Norges Bank, and that Norges Bank should have a separate monetary policy board (apart from its administrative board)”.

“In essence, this illustrates that Norway is taking more and more steps towards making monetary policy actions independent of oil in preparing the economy for the future”.

“EUR/NOK ended the day slightly lower but driven notably by oil prices ticking a tad higher”.

“Indeed, both CAD and NOK are seeing some relief to recent woes. However, the meagre inflation figures out of Canada on Friday illustrate that while the Bank of Canada looks eager to hike due to a housing boom, it may prove difficult”.

“Norway faces a similar situation: last weak Norges Bank had to acknowledge a weak inflation outlook and flattened its repo rate path to let everyone know it is in no hurry to hike. In our view, this will keep NOK strength at bay. We still prefer to position for EUR/NOK downside via options”.