NOK Appreciation Expected to Slower the Pace – Danske Bank
Chief Analyst at Danske Bank Jakob Christensen has assessed the prospects of the NOK ahead in the year.
“With regard to the NOK, there are relative few releases of economic data. Hence the NOK continues to see strong support amid the higher oil price”.
“Admittedly, the oil price increase and NOK appreciation seen over the past week have been much stronger than anticipated. As we for a long time have argued that the appreciation potential for the undervalued NOK would be the strongest in H2 it naturally leaves the question of whether NOK strength has more to go”.
“Overall, we prefer to take a cautious stance as a further oil price increase of 5-8 USD/bbl from current levels would send the black gold to levels where many US shale producers again would become profitable and re-enter the market”.
“Also, importantly, the effect of the oil price increase will only have lagged effects on the Norwegian real economy. With the latest strong repricing of Norges Bank monetary policy (now only c.25bp priced on 12M) we have yet to see clear evidence that no more stimulus is needed from Governor Olsen – especially given the very dovish rate path presented one month ago suggesting a full 25bp rate cut over the next 5M”.
“The significant appreciation of the NOK might just be too early in terms of the currency aiding the oil-dependent economy through its transition phase”.
“Indeed, from a historical reaction function the latest appreciation of the NOK would alone suggest a Norges Bank reduction in the rate path of 20bp. Finally, technical indicators also suggest a marked reduction in the NOK upside potential after last week’s rally”.