EUR/NOK: Krone appears cheap relative to Norges Bank’s hawkish policy stance – MUFG

During June the krone weakened marginally against the euro from 10.179 to 10.212. Nevertheless, economists at MUFG Bank expect recent NOK weakness to prove temporary. 

Norwegian krone to strengthen further in the year ahead

“The recent sell off has made the krone appear even more undervalued relative to Norway’s positive fundamentals. Yield spreads have continued to move in favour of the krone especially against the euro as the Norges Bank delivered their own hawkish policy update.”

The Norges Bank has reinforced their position as the most hawkish G10 central bank by bringing forward plans for the first rate hike to September from December. We then expect the Norges Bank to deliver rate hikes every quarter in the year ahead. The Norges Bank’s decision to bring forward rate hikes reflected increased confidence in the economic recovery with growth rebounding faster than expected as COVID-19 restrictions have eased. The mainland economy is expected to expand robustly this year and next by around 4.0%.” 

“The higher price of oil should encourage a stronger krone over time as well. The price of oil has risen back above pre-pandemic levels as demand has recovered more quickly than supply.”

“On balance, we continue to expect the krone to strengthen further in the year ahead.”