EUR/NOK: Upgrade in Norges Bank’s projections to drive renewed appetite for the downside – Credit Suisse

Economists at Credit Suisse expect the Norges Bank to validate markets’ expectations of a Q421 hike and to signal higher risks of an earlier hike too, as soon as at the 23 Sep meeting. With policy expectations largely stable amid stronger than expected data, a hawkish outcome can renew market appetite for EUR/NOK downside, in line with a 9.80 target.

Rising stakes for higher rates

“We think the bar for Norges Bank projections to meet expectations of a December hike is not high, in the light of the much stronger than expected growth and employment developments. Markets however are most likely to focus on the possibility of a September tightening and of more than one hike by year end. With less than 2 hikes priced in this year, we think that a depo rate path suggesting as an example a 50% probability of a Sep hike would be taken in stride by rates markets, with positive implications for NOK.”

“We’ve been constructive on NOK for most of the year, with a 9.80 EUR/NOK target since early April. Ahead of this week’s meeting, we favour holding on to the position, as we see potential for EUR/NOK downside to resume if the Norges Bank were indeed to deliver the hawkish outcome that we anticipate. A dovish outcome from the FOMC would also likely prove supportive for the trade. If instead the Norges Bank were to refrain from acknowledging the possibility of a Sep hike, in all likelihood the position will expire worthless.”