© Valentin Marinov
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If we look beyond the latest very disappointing PMI data, which fell into the contractionary territory declining from 54.5 to 46.3 in June, the overall impact so far has been rather minimal. The Eurozone crisis has been ongoing for quite some time, yet economic surprise index has been consistently very positive for Norway for quite period of time. This is also reflected in the more constructive assessment of the Norwegian economy in the latest Norges Bank monetary policy report. They prevised their projections for growth to the upside. Importantly the reason of the Norwegian Krona's positive performance is the fact that the recent concerns about subdued price pressure, that is actually very low inflation, seem to be abating. Thus, low inflation is not such a big concern. If you combine the two, the fairly resilient economy and the still no threat of deflation (excessively low inflation) in Norway, we suspect that the Norges Bank will likely remain on-hold in the foreseeable future and keep its policy unchanged. Important still again their last policy meeting the Norges Bank revised to the upside their conditional rate path actually signaling earlier hikes from current levels then before all that likely to continue to support the Norwegian Krona.
How would you evaluate current performance of the Norwegian/ Swedish Krona?
That is great, to be honest. EUR/NOK did remain close to the lows of 7.50 against the Euro. Overall the resilience we are seeing in Nokkie is something we are also seeing in other so called G10 small currencies, which are Scandinavian currencies, as well as the Australian Dollar, the New Zealand Dollar, the Canadian Dollar. Actually, investors are continuing to look for alternatives of the so called G10 majors: the Euro, the Dollar, the Yen, and the Sterling. Those alternatives are G10 smalls. Investors will continue to be attracted by the superior fundamentals in the Norwegian Krona, by the relatively more hawkish stance of the respective central banks, and importantly the superior fiscal fundamentals in the case of Norway. All that will mean that actually the Nokkie should remain rather resilient and supported against the Euro.
What is your forecast for Q3 and for the end of the year?
I suspect that what we are seeing now and what we are likely to see going forward as well is the Nokkie will continue to be tolerant between its clearly very strong fundamentals and somewhat less supported global economic outlook and the outlook for Eurozone as a whole. On the one hand, the still resilient economy in Norway and subsequently the data dependent on the Norges bank will likely provide more support. At the same time however, the investors appetite for risk is likely to remain less pronounced, given the cyclical headwinds for the global economy and given still unresolved situation in the Eurozone periphery. From that point of view, if you combine those two somewhat conflicting drivers, EUR/NOK is expected to remain close to the recent lows at around 7.50 over the next three month, with the risks still firmly on the downside. 7.45 is our 6-12 month forecast.
An important supporter of Nokkie are private investors demand for alternatives of the so-called majors. However, we are also seeing some evidence of central banks as well, which are looking to diversify away from currencies like the Euro, something which is likely to continue with structural trends transcending the cyclical factors, which I suspect will likely support Nokkie and other G10 smalls.