NOK surges as Norges Bank delivers hawkish statement

Summary:

• Norges Bank delivers its second rate hike in this tightening cycle
• More hikes have been communicated, the strong case for firm price pressures to continue
• Krone surges across the board, USDNOK breaks below its key support

Norway stands out

The Norwegian central bank decided to lift interest rates by 25 basis points on Thursday, as widely expected. The main rate was raised to 1%, it was the second move in rates in this monetary tightening cycle. Although today’s move had been broadly anticipated, the message sent by the Norges Bank may have surprised some market participants. Namely, the bank’s statement cleary stands out when we compare it to the information conveyed by the Federal Reserve or the European Central Bank. Below we present a brief summary of the major points from today’s statement:

• Both headline and core inflation gauges have been revised up for this and the following year, the pace of growth is forecast to remain above the target this year

• GDP projections have been revised up and they point to solid 2.4% growth this year and 2% in the following year

• The bank sees a wider output gap compared to what it had seen in December, the gap is likely to widen more in 2020

• Capacity utilisation is seen to be slightly above a normal level

• The interest rate path has been altered upwards alike, the outlook and the balance of risks imply gradual interest rate increases ahead (in the second half of the year is in play)

There is no doubt that the Norges Bank looks currently like the most hawkish central bank in the G10 group. Having in mind that both the Fed and the ECB have capitulated recently it should place the NOK in a position to appreciate over the rest of this year. At the same time, the Swedish krona is likely to stay under downward pressure against the NOK given the fact that inflation pressures have been much more muted in Sweden. Moreover, the latest ECB’s decisis is likely to constrain the Riskbank’s ability to tighten policy any time soon. To sum up, in our eyes the Norwegian currency appears to be the best buying opportunity among other majors.  

Upbeat technical outlook

Technically the USDNOK is breaking the lower bound of the bullish channel. If it does so successfully, it could open the way for much lower levels. We think that 8.00 looks attainable over the next couple of months as markets will be repricing the more hawkish bank’s notion. It implies roughly a 5% expected rate of return. Source: xStation5