Norwegian Krone Tipped To Rise With Moves Dominated By Global Risk

Norwegian Krone Tipped To Rise With Moves Dominated By Global Risk

Published: 21 Aug 2020 07:05

Norges bank holds rates at 0.0%, Norwegian krone moves dominated by global risk conditions, Credit Agricole remains bullish

The Norges Bank held interest rates at 0.0% and, according to Credit Agricole, global risk conditions will tend to dominate Norwegian krone moves with significant net gains forecast.

Risk appetite dominates NOK and commodity currencies as yields collapse

Credit Agricole looks at overall trends in risk appetite and also the extent that currency moves are correlated with risk conditions.

The index has components such as equity-market volatility, credit spreads, commodity prices, FX volatility and the performance of emerging-market assets relative to major currencies.

The analysis illustrates that the covid-19 crisis has triggered big changes in currency-market behaviour this year. An important element of this has been the collapse in short-term interest rates across all major countries.

Currency markets usually look at yield spreads as a key driver of currencies, but rates are now all close to zero.

Looking at the currency sensitivities, the Norwegian krone, Swedish krona, Australian dollar and Canadian dollars are all much more sensitive to risk appetite than in 2019.

The most extreme shift has been by the Norwegian krone. If risk appetite remains strong the krone will strengthen while it will weaken if fear intensifies.

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Image: FX sensitivity

In its latest policy statement, the Norges Bank held interest rates at 0.0% and expects rates to remain at this level.

“In its assessment of the balance of risks, the Committee gave weight to the considerable uncertainty surrounding the further economic recovery. Recently, the spread of Covid-19 has increased, and some containment measures have been reintroduced. The Committee also focused on housing market developments. Persistently high house price inflation may result in accumulating financial imbalances.”

“The Committee’s assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at today’s level for some time ahead.”

Weaker risk appetite has undermined the krone with EUR/NOK has strengthened to near 10.59 amid a weaker risk tone with USD/NOK near 8.95 and 18-month lows below 8.80 on Monday.

Credit Agricole remains bullish on the Norwegian currency with firm risk conditions; “We expect dips to continue proving a buy with our year-end outlook pointing towards further upside for the NOK.”

The bank expects EUR/NOK to retreat to 10.20 by the end of 2020 with further krone gains next year.

The GBP/NOK exchange rate is forecast at 11.33 by year end from 11.75 now with 10.56 by the end of 2021.

Image: GBP/NOK exchange rate chart

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