Major Overnight Headlines
• Asian, European equities firm as Syrian tensions decline again, DXY rallies after falling initially
• Italian Q2 GDP contracted by more than previously estimated, down 0.3% QoQ (-0.2% at first pass)
• French industrial production down 1.8% YoY in July versus a decline of 0.5% expected
• AUD firm as Chinese August industrial production annual growth rate beats estimates
Slightly off the “beaten track”, Norwegian underlying CPI (adjusted for tax changes and excluding energy) rose by 0.7 percentage point in August to 2.5%, bringing the annual growth rate to its fastest pace since the summer of 2009. In YoY terms, the housing component rose by 7.5% following an 8.1% increase in July. From our perspective this places the Norges Bank in a dilemma. On the one hand, rate hikes can help cool an overheated economy. On the other hand, Norway’s real and nominal broad effective exchange rates are already extremely rich, and household balance sheets in most Nordic economies (but particularly Norway) are very susceptible to abrupt house price corrections.
We’re sticking with the view that private sector deleveraging might be more aggressive, and more damaging, if monetary tightening is heavily leaned on as a means of unwinding a significant portion of the excess. Going forward, it seems more likely to us that policy makers will “up” their reliance on macro-prudential tools in order to cool overheated sectors of the economy so that the “blunt” impact of tighter monetary policy can be avoided somewhat.
This unexpected data today now reduces the degree with which we view the NOK as a viable “fade on rallies”, with the Norges Bank monetary policy announcement ahead next week. But, but the macroprudential argument as well as the need to cool overheated sectors of the economy still support our medium-term stance on the NOK.
Read the full report: FX Daily
BMO