NOK: Guided by oil prices and the US yield curve - Rabobank

The USD’s recent bounce back has appeared to push the usual relationship between commodity currencies and oil prices out of alignment, according to Jane Foley Senior FX Strategist at Rabobank. 

Key Quotes

“Previous experience suggests that this will be temporary.  Although it is difficult to anticipate precisely when the relationship will normalize, but there is a greater likelihood of further oil prices gains lending support to the NOK, CAD and RUB vs. the greenback.”

“For the NOK, however, domestic factors could still weigh.  In contrast to many Eurozone economic data releases, recent Norwegian economic data have tended to disappoint.  These include Norwegian September manufacturing PMI, August industrial production, September CPI, and September retail sales.  That said, Norway’s August unemployment fell further to 4.1% and the October manufacturing PMI rose to 54.5 from a previous number of 52.3.  The recent spate of poorer data contrasts with economic releases related to the spring which were generally good.  It is possible that recent declines in house prices are having a negative impact on confidence and on household spending habits.  The implication is that the Norge Bank is set to retain a cautious tone.” 

“In its policy statement on October 26, the Norges Bank endorsed “a continued need for an expansionary monetary policy”.  It also stated that “capacity utilisation in the Norwegian economy was assessed to be below a normal level, and inflation was expected to remain below 2.5 percent in the coming years. The Executive Board's assessment of the outlook and the balance of risks suggested that the key policy rate would remain at 0.5 percent in the period ahead”.  The message is that policy is set to remain on hold for some time yet with the key policy rate unchanged at 0.5%.  This contrasts with the less dovish tone of several other central banks specifically the ECB, Fed and the BoE.”  

“The Norges Bank’s dovish tone on October 26 explains the fall in the value of the NOK vs. the USD at the end of last month.  EUR/NOK, however, has shown less direction since October 26 as the market reacted to the ECB meeting on the same day.  Looking forward we expect EUR/NOK to stabilize around current levels on a 1 to 3 mth view assuming the tone of Norwegian economic data improves in line with global trends.  Medium-term, we expect the better price of oil should provide some support to the NOK.  We look for a move back towards the EUR/NOK 9.30/40 area medium-term.”