EUR/NOK to dip toward 10.40 on a Norges Bank hawkish statement

Economists at Credit Suisse expect the 20 August Norges Bank meeting to drive a hawkish repricing of monetary policy expectations, with positive implications for NOK. In particular, they see potential for an improved growth outlook from rising oil prices to start to offset the negative FX implications of reduced NOK purchases by the Norges Bank. All in all, they remain constructive and target 10.40 in EUR/NOK.

Key quotes

“Norway’s 2020 budget, approved in Dec 2019 but updated in May 2020, assumed Brent prices at $33.20/bbl in 2020. Likewise, Norges Bank’s June MPR forecasted Brent prices for August 2020 at $38.73/bbl. Prices are currently about 35% higher than the budget estimate, and 16% above the MPR estimate. Furthermore, on 30 April the Norwegian government passed temporary changes to its petroleum tax system in an effort to foster investments. While Norges Bank discussed the benefits of the tax change and the higher oil prices in its June MPR, we believe the current outlook has surpassed its expectations and might push Norges Bank to sound more upbeat.” “Norges Bank’s preferred measure of CPI, the CPI-ATE, printed 3.5% YoY versus expectations of 3.1% YoY in June. Norges Bank may not feel the need to adjust policy to respond, but we do expect that this upside surprise will temporarily put to bed any expectations of bond purchases or further dovish forward guidance. We see a risk that Norges Bank will use this week’s rate decision statement in order to set the stage for a more hawkish MPR on September. Norges Bank could use the 24 September meeting to present a new policy rate path and bring forward the rate hike that the bank had pencilled in for Q12023 in their June MPR. We suspect that a change in language in the statement this week could give markets reasons to start pricing in a more hawkish outlook for September.” “We see potential for any hawkish development in the Norges Bank’s statement this week to be supportive for NOK, and likely to drive a repricing of market expectations for the September meeting. Against the backdrop of a reflation-minded market and of rising oil prices, we see potential for an idiosyncratic monetary policy kicker to keep EUR/NOK under pressure, in line with our 10.40 target.”