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The Norges Bank kept the deposit rate on hold at 0.00% but delivered a hawkish message. The Norges Bank’s upgraded hiking profile has seen a significant move in rate differentials in the NOK’s favor vs the EUR. This, together with the recent rally in crude has left EUR/NOK simply looking too high relative to fundamentals, in the view of economists at TD Securities.

Upgrade to the rate path to provide the NOK with a supportive tailwind  

“The Norges Bank left its policy rate on hold, but signalled a September rate hike as clearly as we could have expected. Looking at the Norges Bank’s policy rate projections, beyond the September rate hike it has pencilled in a policy rate of 0.28% in 21Q4, and 0.57% in 22Q1, followed by 0.78% in 22Q2 and 0.96% in 22Q3. This means that the Norges Bank is looking to deliver 4 rate hikes in the next 5 quarters.”

“Rate differentials have provided a consistent anchor for the trend in EUR/NOK in recent months. We expect this to remain the case. If confirmed, that points to notable further downside potential in the cross.”

“With front-month Brent crude prices now at their highest levels in more than two years, the implied gap to EUR/NOK is at its widest since March 2020, in some of the darkest days of the pandemic.”

“The rebound from the late-April lows around 9.90 continues to exhibit the hallmarks of a corrective move, in our view. As such, we think the primary trend is for further declines and remain focused on downside risks for the cross over the medium-term.”  

“The knee-jerk reaction to the policy announcement found initial support around the 10.12 mark and the cross has largely consolidated since. This leaves us inclined to sell rallies from here, with an immediate focus on the overnight high at 10.2108 ahead of 21 May top (10.2410). Looking lower, we note that 10.07 and 10.04 are likely to represent the next primary attractors to the downside. Beyond this, however, we think the cross should move to fresh cycle lows below 9.90 in the weeks ahead.”