NOK/SEK: Modest upward bias – Rabobank

According to Jane Foley, senior FX strategist at Rabobank, NOK/SEK has been stuck in a range and the failure of the NOK to pick up steam after the hawkish policy announcement from the Norges Bank on March 21 is in part due to the reluctance of the market to believe policy markers’ projections on rates. 

Key Quotes

“In Sweden, the backdrop of subdued inflation pressure continues.  Given the economy’s vulnerability to slowing growth in the Eurozone, the market has been even more reluctant to believe the Riksbank’s official policy guidance that “the forecast for the repo rate indicates that the next increase will be during the second half of 2019”.  For preference we favour a modest upward bias in the NOK/SEK cross.”

“In the year to date the SEK has dropped 4.7% vs the USD making it the worst performing G10 currency. Expectations of negative rates for longer have been behind the poor performance and this has meant that for some the SEK has become a useful currency to fund carry trades.  That said, liquidity in both the SEK and the NOK can be lacking.  The lack of liquidity in the NOK means that despite it having the most hawkish central bank in the G10 not all investors will participate.  The result is that flows into the currency have been tempered.”

“Despite the risk that the Norges Bank may only be able to hike once more this year, stronger oil prices and the improved interest rate differential should lend support to the NOK vs the SEK.  We see scope for a move towards NOK/SEK1.10 on a 3 month view.”