EUR/NOK: Positive tailwinds for the krone to ease in the year ahead – MUFG

During October the krone strengthened against the euro from 10.107 to 9.7700. The krone has benefited from three key factors recently but economists at MUFG Bank expect the current positive fundamental tailwinds to ease in the year ahead. 

Three positive fundamentals have encouraged a stronger NOK

“Firstly, the price of oil has continued to rise with Brent moving to within touching distance of our year-end forecast of $87/barrel. The 30-day correlation between daily percentage changes in EUR/NOK and the price of Brent has averaged a record high of -0.64 over the past quarter.”

“Secondly, the krone has benefitted from the recent improvement in global investor risk sentiment. The MSCI’s ACWI global equity index has almost fully reversed September’s sell-off as heightened market concerns over downside risks to global growth from China and higher inflation have eased for now. “

“Thirdly, the krone is continuing to benefit from the Norges Bank’s hawkish plans for further policy normalization. The Norges Bank was the first G10 central bank to start raising rates, and it has indicated that it expects to raise rates at a quarterly pace going forward with the next hike likely in December. The Norwegian rate market expects the policy rate to rise towards 1.25% in the year ahead. The latest economic data from Norway has supported rate hike expectations as well.”

“While these factors are likely to remain supportive for a stronger krone in the near-term, we expect the current positive fundamental tailwinds to ease in the year ahead.”