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Jane Foley, Senior FX Strategist at Rabobank, points out that after the JPY, the NOK is already the second best performing G10 currency in the year to date and now that oil prices are flirting with the $80 /barrel level, it is possible that the better tone in the NOK has further to go.

Key Quotes

“The majority of G10 central banks have this year pushed back against hawkish market speculation. These include the ECB, BoJ, BoE, Riksbank, RBA and the RBNZ.   By contrast the Fed and the Norges Bank have remained steadfast in their guidance that rates will be headed higher this year.”

“The Norges Bank inflation target was altered this year such that policy makers are now mandated to target CPI inflation close to a lower level of 2% over time. The move was not supported by the finance committee of the Norwegian parliament on the basis that it would likely bring earlier rate rises, lead to a stronger NOK and create problems for the export industry.”

“As a large oil exporter the Norwegian economy stands to benefit from the higher price of oil and the increased amount of activity in the North Sea.   This suggests increased reason for the Norges to follow through with its guidance of a rate hike in the second half of this year.   Following the recent recovery in the value of the USD, the correlation between NOK/USD and oil prices has fallen out of sync.   This suggests the potential for gains in the value of the NOK vs. the USD.   That said, given our bearish medium-term view on EUR/USD and since the EUR is again under pressure from fiscal concerns stemming from Italy and by the ECB’s persistently dovish tone, we continue to favour buying the NOK vs. the EUR.   We maintain a 12 month forecast of EUR/NOK 9.20.”