BNY’s Geoff Yu expects a challenging near-term backdrop for Norwegian Krone (NOK) despite solid Norwegian fundamentals and potential Norges Bank tightening. He argues that upcoming changes in Norges Bank FX transactions, with a likely return to NOK selling as oil revenues stay strong, could offset any hawkish policy impulse and limit further currency re-rating over the coming quarter.

Hawkish Norges versus FX sales risk

“A key theme for end-April rebalancing flows is some softening in commodity-linked currencies in G10 and EM. This is not a call against fundamentals in any way, and we expect balance of payments to remain strong in Norway, Australia and much of Latin America. However, with the ceasefire still in place and domestic economies adjusting rapidly, there is now a window to take stock of idiosyncratic factors. “

“For example, the rate decisions in Scandinavia next week may all have a hawkish lean in line with peers in Europe, but we expect the near-term outlook to be relatively challenging for both SEK and NOK. The Riksbank is expected to stay on hold, and full-year pricing is well below the ECB.”

“Meanwhile, Norges Bank has already flagged a potential hike, but further changes will heavily depend on wage developments. Furthermore, even if Norges leads tightening, we believe the balance of flow is on the verge of shifting as Norges Bank is able to start selling NOK again.”

“We believe a repeat of the 2022 situation will likely repeat, whereby a geopolitical shock suddenly boosts oil revenues well above expectations, resulting in a 38-month run of net FX purchase and NOK sales. “

“Barring extremely aggressive Norges hikes, it is hard to see other factors supporting further re-rating in the currency.”

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