NOK: Is it the hidden liquidity driver? – Nordea Markets
Analysts at Nordea Markets point out that despite another very firm signal from Norges Bank that the policy rate will be hiked in September; the NOK has failed to materialize.
Key Quotes
“Why is NOK not trading stronger? Let us try and identify some possible reasons.
- Softness in NIBOR-rates, which is to a certain extent driven by the excess banking liquidity story that we have flagged over the last months.
- A weak SEK spills-over to a weaker NOK
- NOK (as is EM) seems vulnerable to a pick-up in US real rates”
While the softness in NIBOR is mostly related to the tighter USD Libor-OIS spread, there is also a domestic explanation. The amount of excess bank liquidity is on the rise again in Norway (after being very tight in May/June), which also leaves a slightly smaller “domestic” liquidity premium in NIBOR. In our projections the excess liquidity will continue to climb (on a smoothed basis) until mid-September, which could be a slight problem for NOK until then.”
“Come mid-September I) the excess liquidity situation will no longer speak against a stronger NOK (rather slightly in favour), ii) Norges Bank will likely deliver a positive adjustment to the rate path on top of a rate hike (due to the weak NOK) and iii) US LIBOR-OIS spreads could start to re-widen due to the big bill issuance. This combination should prove to be widely NOK positive, but we don’t rule out that levels of around 9.80 in EUR/NOK will be reached before then.”
Author
Sandeep Kanihama
FXStreet Contributor
Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.
