NOK: Is it the hidden liquidity driver?

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.”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.