Volatility in EUR/NOK has spiked recently. Despite the downshift in economic activity during spring, fundamentals are healthy enough and the central government will still reap a substan-tial budget surplus. We thus wouldn’t argue that the NOK volatility is due to a reassessment of fundamentals. However, it’s a credibility issue for Norges Bank (some investors have likely sold their Norwegian assets as the monetary policy transparency has been poor). At times, one could speculate that Norges Bank’s unwillingness to trigger NOK appreciation has resulted in an unjustified low rate path. In the September MPR, the bank’s bearish growth outlook (now well below consensus’) motivated low rates. Macro data will thus be decisive for the timing of a hawkish shift in policy. However, as specs seem more inclined to short NOK, the currency will be more vulnerable for negative rather than positive data surprises in the near term. Although we expect momentum to pick-up going into next year, Norges Bank’s growth forecast has yet to be proven too cautious. Eventually, though, lifting the rate path will be inevitable. We expect that to happen in the March MPR, at the earliest, with a subsequent hike next summer. It will thus require more time for monetary policy to support NOK. Coupled with continued high volatility and positioning we believe it’s yet too early going long NOK on strong fundamentals and wider rate spreads.
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