NOK Update: Market pessimism overdone for Norway – Nordea

Right now, the market is pricing in around 5 rate cuts from Norges Bank over the next year. We think this is vastly overdone and see a clear upside to forward interest rates but as a consequence, also a clear downside to EUR/NOK, Nordea FX analysts note.

A clear upside to the current market pricing of rates

“While the drop in rates expectations abroad surely pulls the rate path from Norges Bank down in isolation, the deprecation of NOK more than compensate for this. The fact that NOK is currently some 4% per cent weaker than assumed by Norges Bank keeps the rate path more or less unchanged in total. It seems that the market is forgetting the weak NOK when they price in a total of 130bps cuts from Norges Bank the next year.”

“With growth picking up and inflation, while somewhat lower than expected still much higher than comfortable for Norges Bank, we just don’t see the need for Norges Bank to stimulate the economy much. At least not with NOK at this weak levels. The weakening of NOK we have witnessed lately will mean higher inflation 6-9 months out.”

“We therefore see a clear upside to the current market pricing of rates in Norway. This should in consequence also support the NOK going forward. With Norges Bank staying more hawkish than the market pricing suggest and with the Fed starting to gradually reduce rates from September, NOK should get support going forward. We see EUR/NOK at 11.50 by year end.”