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Despite a very firm message from Norges Bank  last week, with a rate path indicating 100% probability of a September hike and as much as 50% probability of a following hike in December, the NOK hasn’t really rallied, notes the research team at Nordea Markets.

Key Quotes

“EUR/NOK traded briefly below 9.40 in the aftermath of the message, but the move has faded slightly since.”

“The NOK would likely have rallied much more, if this hiking message from Norge’s Bank had coincided with a period of risk on in markets.  Since February EUR/NOK (and also partly EUR/SEK) has traded very closely connected to periods of risk on and risk off, as indicated by the high correlation with S&P 500.”

“A cease-fire between Trump and Xi is likely needed to pave the way for lower EUR/NOK and EUR/SEK. If the global environment allows it, recent signals from Norges Bank and the Riksbank indicate that both central banks will “tolerate” stronger currencies.”

“Norges Bank could accept EUR/NOK in 9.20 in Q4 without any bearing on monetary policy, that is, an unchanged NOK from here is hence an upside risk for this week’s rate path. The Riksbank KIX forecast implies that EUR/SEK could trade in the range 10.10-10.15 in Q2 and around 9.90 in Q3 without a negative impact on monetary policy.”