Prospect of August hike in Norway can help the krone
At a Glance
The desk believes that the Norwegian krone (NOK) is poised for appreciation ahead of the Norges Bank's anticipated 25 basis point hike in August, driven by persistent inflation concerns. Per the full note from ING, the central bank's hawkish tone following its recent policy meeting suggests a proactive approach to combating inflation, with projections indicating a rate of 4.32% by Q3 2023 and 4.55% by Q4 2023. This hike aligns with a broader trend among global central banks, where front-loading rate increases is becoming the norm. Currently, NOK is expected to gain particularly against high-beta currencies, although external factors will continue to play a significant role throughout the summer market.
Key Takeaways
- 01Norges Bank likely to hike rates by 25bps in August.
- 02Current inflation stands at 3.4%, above the target of 3.0%.
- 03NOK expected to appreciate against high-beta currencies as rate hike anticipations build.
- 04External factors will remain influential in the summer FX markets.
Full Analysis
What the desk is arguing
The desk believes that heightened expectations for a rate hike in Norway will lend support to the krone, particularly against high-risk currencies. Per the full note from ING, Norges Bank maintained its rate at 4.25% today but signaled intentions to raise rates before the end of summer, with a 25bp hike likely in August. This aligns with ongoing inflation pressures, needing to bring underlying inflation rates back below 3.0%, as the current CPI-ATE is tracking at 3.4%.
Norges Bank's latest projections suggest rates will average 4.32% in Q3, illustrating a clear path toward tightening. Following this logic, if inflation remains elevated through the coming months, the decision to implement an additional rate hike in August could be seen as a pivotal point for NOK's strength against other currencies, particularly if the market views the hike as merely the beginning of further tightening.
Where it sits in our coverage
Our consensus target for NOK/USD is 1.075, with an expected range of 1.04 to 1.12. Specific targets from key firms include: - jpmorgan: 1.10 (Mar 26) - bofa: 1.04 (Mar 26)
This view regarding the krone's potential appreciation aligns closely with jpmorgan. Notably, it reflects an optimistic outlook on NOK's strength, sitting at the upper range of the consensus expectations, diverging from bofa's more conservative stance.
How other firms see it
Firms such as jpmorgan and deutsche align with an optimistic view on NOK, backing the narrative of further tightening from the Norges Bank. Conversely, bofa takes a more cautious position regarding the currency’s potential, suggesting it may not strengthen in the near term.
Monitoring the economic indicators from Norway will be crucial, particularly consumer price indices and the trajectory of international energy prices, which have significant implications for NOK.
Market Implications
Traders should watch for movements in NOK/USD towards the 1.075 target. Additionally, upcoming economic data releases on inflation will be critical to gauge whether the August rate hike is fully priced into the market. Pay attention to correlations with high-beta currency dynamics.
From the original
Articles Prospect of August hike in Norway can help the krone 14:44 FX Norway Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download After today’s hawkish hold, we expect Norges Bank to deliver a 25bp hike at the August meeting, in line with its prefer
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Norges Bank hikes and keeps guidance hawkish
The recent decision by Norges Bank to hike rates and maintain a hawkish guidance underscores a robust approach to inflation management. This aligns with the broader market expectations of continued monetary tightening throughout the region.
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