Stay short NOK ahead of Norges – Deutsche Bank

Ahead of today’s Norges meeting, Robin Winkler, Strategist at Deutsche Bank continues to see good risk-reward in NOK shorts.

Key Quotes

“In our view, the projected rate path is most likely to remain unchanged, which would likely be enough to surprise the market on the dovish side. The risk to this baseline, moreover, is that Norges pencil in the 0.40% cycle low beyond 2018, thus strengthening their easing bias.”

“Like most market participants, we expect Norges to revise up their medium-term growth and output gap forecasts in light of last week’s strong regional network survey, backed up by a better-than-forecast GDP print for the first quarter. The risk, however, is that it is not enough to translate into higher inflation forecasts, for two reasons. First, the latest survey was taken in May when brent prices still averaged at $52, so Norges will likely account for the slump in June. Second, although growth in the first quarter already beat Norges projections, core inflation has undershot this year. Norges would therefore need to improve their growth forecast sharply to raise what is already an optimistic inflation outlook. In fact, the risk is probably that recent inflation misses make for marginally lower inflation forecasts and a more extended rate projection at 0.40%.”

“A more hawkish market bias for the meeting is reflected in constructive NOK flows going into the event, especially when considering that falling oil prices should have been a major headwind. Corax has seen net NOK buying over the past week and Norges Bank flow data also suggest that the aggressive selling seen in May has ceased, if not flipped, this month. As ever, net positioning in the kroner is hard to ascertain, but cumulative flows on Corax suggest it remains marginally long and at any rate too light to support the kroner in case of another dovish Norges outcome.”

“Finally, while the bearish argument doesn’t hinge on further downside in oil prices, we see the near-term risk skewed in that direction. Oil pricing also explains our marginal preference for being short NOK against SEK rather than EUR: while the NOK TWI has adjusted smoothly to lower brent prices, both NOK/SEK and EUR/NOK are modestly expensive against current spot prices.”