Norges Bank FX transactions statistics released today show that foreign banks (proxy for speculative flows) net sold NOK 3.2bn in the Norwegian currency last week . The net selling primarily reflects how Norges Bank surprised markets on 24 September by cutting the sight deposit rate by 25bp to 0.75% whilst signalling a high probability of another cut (for more details see Norges Bank Review: a 25bp cut and an easing bias ). As figure 1 shows, it was the first time in five weeks that banks net sold the Norwegian currency after a post-summer period of short covering.
Importantly, the chart shows that, while the NOK weakened significantly on the Norges Bank's announcement, the net selling was actually very limited from a historical perspective (chart 1 ). Indeed, according to our microstructure model on FX flows, the weakening of the NOK was considerably greater than what a historical/statistical relationship would suggest (chart 2). According to the model, the import-weighted NOK (the index Norges Bank projects) should have weakened by just 1% due to the selling pressure during the week and not by the actual 3%.
In our view, the move higher in the I44 reflects further considerable widening of the NOK liquidity- and risk-premium as markets have priced a 'Norges Bank uncertainty' premium into the NOK . This has contributed to sending the I44 index to the highest level ever recorded (since 1989). While a tightening of this risk premium together with overall stretched short speculative positioning should eventually become a NOK positive when the business cycle turns, we still expect the NOK to trade around the current weak levels in the months ahead. We target EUR/NOK at 9.40 in 1M, 9.40 in 3M, 9.25 in 6M and 8.80 in 12M.
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