Prospect of August hike in Norway can help the krone
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
The primary risk to this bullish call on NOK hinges on any significant macroeconomic data releases that could suggest a slowdown in inflation or economic growth in Norway. A lack of further clarity from Norges Bank on the inflation outlook could also undermine the case for an August hike.
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 preference to front-load tightening and amid still-elevated underlying inflation. This should lend some support to NOK, especially against other high-beta currencies, although external drivers are likely to stay dominant over the summer Francesco Pesole We wouldn’t expect policymakers to close the door to further tightening when hiking in August, so risks remain slightly on the upside for NOK front-end rates this summer A hawkish hold today Norges Bank delivered no surprise today, holding rates at 4.25%. As we expected , the communication was hawkish, with a clear signal that rates will likely need to rise again at one of the next few meetings.
Accordingly, the new rate projections show an average of 4.32% in this year's third quarter and 4.55% in the fourth. This fully prices in a 25bp hike in the third quarter, with roughly equal odds for August or September, and implies around a 20% probability of a further move between the final quarter of 2026 and the first quarter of 2027. In our view, the key to the current policy stance in Norway is that inflation concerns predate this spring’s energy price volatility.
We expect Norges Bank to remain mostly focused on bringing underlying inflation (CPI-ATE) sustainably back below 3.0% (currently 3.4%). In its latest projections, that is only achieved in the second quarter of 2027. Norges Bank signals more tightening in new rate projections Source: Norges Bank, ING "> Source: Norges Bank, ING One last hike in August Our call is for a 25bp hike in August.
While CPI-ATE has been jumpy of late, it should stay above 3.0% in the next two months (June and July prints), and Norges Bank has shown a preference to front-load tightening. At this stage, we see the August move as the end of the cycle. Norges Bank is likely to remain mindful of overtightening risk, while a period of softer energy prices should help reduce concerns about persistent inflation.
That said, risks remain skewed to the hawkish side, as there is a non-negligible chance that policymakers are underestimating second-round effects. Norges Bank also tends to be sensitive to interest rates abroad. Should the Federal Reserve or European Central Bank hike more than once this year, it would face both direct hawkish pressure and indirect pressure via potential krone depreciation, raising imported inflation concerns.
NOK can outpace other high-beta currencies Market pricing roughly replicates Norges Bank’s latest rate projections: 15bp for the August meeting, 27bp for September, and 30bp for December. As we wouldn’t expect policymakers to close the door to further tightening when hiking in August, we think risks remain slightly on the upside for NOK front-end rates this summer. That is, assuming pricing for the Fed does not turn materially dovish, bringing other countries’ rate expectations lower.
Norges Bank’s hawkish stance is a positive factor for NOK. We expect it to be particularly visible against currencies with similarly high beta to risk sentiment but more dovish central banks. We see good upside potential for NOK/SEK and downside potential for CAD/NOK.
In EUR/NOK and USD/NOK, external drivers should remain dominant. Our view is that oil prices are close to bottoming out, but the hawkish Fed poses a risk for less-liquid/high-beta currencies. Still, we retain a downside bias on EUR/NOK, and expect a return below 11.00 this summer and further gradual decline towards 10.60 into early 2027 as fundamentals and carry should emerge as positive NOK drivers.
Policy differential points up for NOK/SEK Source: ING, Refinitiv "> Source: ING, Refinitiv Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Francesco Pesole FX Strategist Francesco is an FX Strategist and has been with the firm since May 2019.
His main focus is on the G10 space and, in particular, on European and commodity currencies. He began his career at Credit… In this article A hawkish hold today One last hike in August NOK can outpace other high-beta currencies
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