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Analysts at Nordea Markets point out that despite another very firm signal from Norges Bank that the policy rate will be hiked in September;  the NOK has failed to materialize.

Key Quotes

“Why is NOK not trading stronger? Let us try and identify some possible reasons.

  1. Softness in NIBOR-rates, which is to a certain extent driven by the excess banking liquidity story that we have flagged over the last months.
  2. A weak SEK spills-over to a weaker NOK
  3. NOK (as is EM) seems vulnerable to a pick-up in US real rates”

While the softness in NIBOR is mostly related to the tighter USD Libor-OIS spread, there is also a domestic explanation. The amount of excess bank liquidity is on the rise again in Norway (after being very tight in May/June), which also leaves a slightly smaller “domestic” liquidity premium in NIBOR. In our projections the excess liquidity will continue to climb (on a smoothed basis) until mid-September, which could be a slight problem for NOK until then.”

“Come mid-September  I) the excess liquidity situation will no longer speak against a stronger NOK (rather slightly in favour), ii) Norges Bank will likely deliver a positive adjustment to the rate path on top of a rate hike (due to the weak NOK) and iii) US LIBOR-OIS spreads could start to re-widen due to the big bill issuance.  This combination should prove to be widely NOK positive, but we don’t rule out that levels of around 9.80 in EUR/NOK will be reached before then.”