NOK & SEK: Opportunity NOKs - HSBC

A combination of a more dovish local rates market and lower oil prices has seen the NOK weaken substantially during March, but analysts at HSBC believe the selling is largely complete and that there is scope for a reversal in the weeks ahead.

Key Quotes

“We look for EUR-NOK to punch back below support at 9.10. EUR-SEK is creeping back to the higher end of a 9.40-9.63 range, but we do not expect a breakout to the topside with resistance at the 200-day MA of 9.5873, the 100-day MA of 9.5970 and the big figure 9.60.”

“The NOK may not be beholden to oil, but it is certainly still sensitive to it. Correlations between daily changes in Brent oil prices and EUR-NOK are at a reasonably lofty -0.56 in the last month, and -0.67 in the case of USD-NOK. The sensitivity is understandable but the scale of the NOK move seems a little overdone relative to the growth threat posed. In fact, most signals suggest the growth dynamic remains strong, with surveys indicating that the upbeat momentum of Q4 GDP has been sustained into the early part of 2017. The Brent oil price has held above support at USD50 and should not be such a headache for the NOK if this stabilization persists.”

“The apparent hypersensitivity likely reflects a perception that lower oil prices could be the additional factor that could tip the Norges Bank into another rate cut. Headline inflation has been tumbling, most recently at 2.5% in February from 4.4% in July 2016. Our economists expect it to fall further to 1.0% in the coming months; this would be well below the Norges Bank 2.5% target. Lower oil prices would accelerate this process and put a question mark over growth. But by the same token, any reversal in the oil price would foster an amplified rally in the NOK. It would also allow the central bank to lean against the worrying pace of house price growth.”

“The NOK has been hit by lower oil prices and the downside surprise on inflation, but the Norges Bank has multiple, somewhat offsetting, considerations that point to unchanged policy. The dovish impulse to NOK, 14bp trimmed from rate expectations for the end of 2017 for example during March, is overdone.”

“EUR-SEK continues to move within a 9.40-9.63 range. We do not expect this to change in the coming weeks. Its trapped nature is consistent with the fundamental backdrop, and tactically we would continue to play the range. Sweden is one of the fastest growing economies in the developed world, and our economists believe the hard data may even be understating the actual pace of growth. All of which would point to EUR-SEK breaking out of the bottom end of the range were it not for inflation.”

“The Riksbank has been heartened by the pickup in inflation towards its target, but structurally it is hard to see where the impulse comes from for inflation to remain near target. This forces the central bank, with its headline inflation mandate, into a dovish policy stance and rhetoric that is at odds with the growth backdrop. This may change, but April is not the month when that gets a grip on the SEK. The next iteration in that potential hawkish game changer for the SEK comes only in June. For now, we believe the range holds."