Norway: Rate cut hopes farfetched
Norges Bank will leave rates on hold at 2.25% this week adding a more dovish tone compared with its surprisingly hawkish previous message. We believe the market is simply incorrect to discount a 30% probability of a rate cut. The NOK has depreciated, returning to levels at which it traded ahead of the SNB decision (which caused the NOK to appreciate 2.5% vs. EUR within 24 hours). Consequently, while we expect comments on the level of the exchange rate and a clear statement declaring its preference for a weaker NOK consistent with its own forecasts, the currency is not a major headache for Norges Bank. Page 3
What’s the option market telling us?
As option prices should reflect the probability of certain outcomes, they sometimes include additional information not discounted at spot level. In the following analysis we use relative price differences between upside and downside options to indicate positioning or expectations concerning the spot market. For example, the EUR/USD skew showed that investors had already begun positioning for a move lower before the summer, a fact not at all reflected in the spot exchange rate until recently. Moreover longer option maturities appear to indicate some doubt that the SNB will be able to defend the EUR/CHF 1.20 floor. Page 5
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Tech team
Skandinaviska Enskilda Banken AB