We’ve observed a Norwegian gradual recovery in the last month’s economic data. While the manufacturing PMIs were not satisfactory, the series is historically very volatile and the overall trend still suggests a decelerating downturn.
This was also supported by the manufacturing production release pointing to a 1pp decrease in Q1. The labour and housing markets still display large regional differences but overall the latest releases have reduced the downside risk to private consumption.
Finally, core inflation remains temporarily elevated (above Norges Bank’s target) due to the last year’s NOK depreciation.
As expected, Norges Bank cut the sight deposit rate by 25bp to 0.50% at the March monetary policy meeting. The revised rate path has a full 25bp rate cut embedded before Q4 16 and a 20% probability of an additional rate cut to 0%.
We expect Norges Bank to cut the sight deposit rate in September, marking the bottom in NOK rates.
Fundamentally, the economic recovery in Norway still strongly depends on a weak currency, lower wage growth and the growth of important trading partners (e.g. euro area and UK).
In the short term the UK EU referendum poses a downside risk to NOK, while a more sustainable NOK appreciation could materialize in H2. We target EUR/NOK at 9.40 in 1M, 9.40 in 3M, 9.30 in 6M and 9.00 in 12M.
With the current outlook we therefore still expect fundamentals and relative rates to limit the EUR/NOK downside potential in the coming 6M. Also Brexit fears will, in our view, be a positive for the cross.
We recommend hedging short term NOK payables via risk reversal strategies and long term payables through FX forwards.
Simultaneously, it is also advisable to hedge NOK receivables using FX knock-in forwards.
The material has been provided by InstaForex Company – www.instaforex.com