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The Norwegian krone has been the worst-performing G10 currency this month declining by -0.6% against the US dollar. It has seen EUR/NOK rise back above the 10.200 level after it failed to break below support at the 10.000 level in recent months. Will recent krone underperformance be sustained? In the view of economists at MUFG Bank, the NOK sell-off is likely to prove a temporary correction.

The krone has failed to advance further

“The main fundamental drivers for a stronger krone have also softened somewhat in the near-term. The price of Brent crude oil has been consolidating at just below $70/barrel. Over the past month, the 30-day correlation between daily % changes in USD/NOK and the price of Brent based to -0.34 from -0.64 at the end of last month. Our oil analyst still maintains a bullish outlook for the price of oil expecting it to rise to new post-pandemic highs this quarter which should encourage a stronger krone.”

“Global equity markets have also lost some upward momentum over the past month as concerns over higher inflation have intensified. USD/NOK has been more strongly correlated (-0.67) to the performance MSCI’s ACWI global equity index.”  

“Yield spreads have also stopped moving in favour of the krone recently. Short-term yields have drifted modestly lower in Norway highlighting that expectations for Norges Bank rate hikes are well priced in at the current juncture. The Norges Bank has already signalled that it plans to begin raising rates in the ‘latter half of 2021’.”

“We still maintain a bullish outlook for the krone expecting it to strengthen further from undervalued levels. We view this month’s sell off as temporary unless there is deeper correction in risk assets.”  

“Our short-term valuation model including rate spreads and the price of oil still signals that fundamentals should keep EUR/NOK under downward pressure to retest and finally break below the 10.000-level.”