Lloyds and SEB: The Norwegian Krone (NOK) is Likely to Rise

The Norwegian Krone is forecast to appreciate due to a combination of strengthening domestic economic fundamentals and expectations of higher oil prices, say two noted analysts.

The outlook for NOK has improved, firstly due to the recent rebound in oil prices and secondly a streak of robust economic data releases.

Norway is a major oil producer and oil revenues support the economy as well as the krone which is closely correlated to price of crude.

Since hitting a low in late July, the recent recovery in crude oil prices has supported a steady rise in the Norwegian krone, pushing EUR/NOK lower from around 9.50 to 9.25.

The GBP/NOK exchange rate has meanwhile fallen from highs at 13.00 in July to the current 10.80's.

“Moreover, the flow of economic data has also been encouraging, pointing to stabilisation in Norwegian activity, which has resulted in some scaling back in expectations of further easing by the Norges Bank,” says head of research and strategy for Lloyds Commercial Banking’s Jeavon Lolay.

The sentiment is echoed by SEB’s Carl Hammer, who singles out EUR/NOK as a pair to sell in anticipation of further declines:

“With an oil price forecast to trade around USD 50/brl, continued NOK purchases by the central bank, an appreciable yield and an attractive valuation, we expect a stronger NOK.”

Hammer, however, is sceptical about the Norges Bank’s willingness to allow the currency to appreciate below 9.00 EUR/NOK.

“Only one factor weakens the case: Norges Bank is unlikely to accept EUR/NOK below 9.00,” says Hammer.

SEB’s forecasts for the pair are for it to fall to 9.20 in one month, 9.10 by the end of the year, and 9.05 by the end of Q1 2017.

Lloyds’s Lolay sees a lack of investment in the oil industry in the short-term as weighing on Norway’s GDP and leading to a further near-term rate cut by the Norges Bank, in order to boost growth,“most likely at its meeting later this month.”

Lloyds forecast the pair to remain relatively range bound in the near term but to fall to 8.90 by, “mid-2017.”

Lloyds Bank's Forecast

Oil Prices Weakens

The bullish NOK forecast, of course, hinges on the price of oil remaining around the 50 mark, however, data form API yesterday showing a rise in crude stocks led to a sharp 3.0% drop in the commodity, which hit oil company’s such as Esso and Exxon in particular, as well as Norwegian oil companies too, no doubt.

The continued volatility of crude oil is a major risk for the outlook for the Krone and increases the likelihood that the Norges Bank will go ahead and cut rates even further, leading to even more weakness for the currency.

When central bank’s cut interest rates it weakens the host currency as it lessens inflows of foreign capital which prefer country’s with higher yields.

Nevertheless, this should be balanced against arguments from most commodity analysts that rising demand for oil from Asia, where, for example, car ownership is rising exponentially in the likes of India, will soak up demand, and ultimately push up prices.