Shaken, NOK stirred – Commerzbank

The Norwegian krone has been shaken since the publication of the last inflation figures at the beginning of July. Four weeks ago, inflation for June surprised to the downside, putting downward pressure on the NOK, as the market was obviously speculating that disinflation would finally take hold in Norway, meaning that Norges Bank could possibly cut the key interest rate sooner, Commerzbank’s FX strategist Volkmar Baur notes.

Significant gains are difficult for the NOK

“Today we will likely be able to better assess this since the data for July will be published. Generally speaking, however, it should be noted that inflation at 2.6%, and above all the core rate at 3.4%, are still well above Norges Bank's target of 2%. The monthly rates of change in the trend are also still too high to guarantee a rapid return to the inflation target. Therefore, I think it is quite justified that Norges Bank is cautious with first interest rate cuts.”

“But it is not only the latest inflation figures that have shaken the NOK. Risk aversion and the oil price did the rest, as did the fact that the potential for interest rate cuts plays a role in the performance of a currency when risk aversion increases. And with a key interest rate of 4.50% since the end of 2023 and Norges Bank continuing to sound restrictive, the NOK naturally suffers particularly in such phases.”

“If the inflation figures for July show that Norges Bank is right in its assumption that inflation will remain elevated for longer, the market could regain more confidence in Norges Bank's restrictive stance, especially as it holds its rate meeting next week. Nevertheless, I must of course concede that in the current uncertain and risk-averse market environment, significant gains are difficult for the NOK.”