Book 4% Profit on Short GBP/NOK Position

Our view in mid-January was that the Bank of England would maintain its dovish stance, that Norges Bank wouldn’t signal more rate cuts, that the oil price would stay elevated or rise further, and that risk sentiment would stay positive. All things materialised and GBP/NOK has fallen steadily since we recommended establishing a short position. 

Bank of England Minutes from the 9 February meeting on monetary policy were somewhat more dovish than the market had anticipated. Our expectation was that the decision to increase the asset purchase target by GBP50bn to GBP325bn had been unanimous, but it turned out that two members of the committee – David Miles and Adam Posen – would have preferred to increase the programme  by GBP75bn. While the current programme runs in three months, it was not specified how the dissenters wanted to spread out the purchases. Speculation in the market prior to the release was that there would be three dissenters – but that these would have preferred no further QE at all. The result was a complete shift in market sentiment and the interpretation was that the MPC clearly upholds a dovish stance and that more gilt purchases are more likely to be announced when the current programme finishes. 

The Norwegian central bank has not flagged further easing and fears of additional rate cuts have faded substantially lately following the relatively upbeat economic data. The recession in the eurozone and the strength of the Norwegian krone is of course worrying for Norges Bank but we do not think it is enough to trigger rate cuts. In our view, it is more likely that Norges Bank will end up reversing the latest rate hike in response to solid growth and the continuing housing market boom.

The recent rise in oil prices has probably also supported our trade and higher equity prices are negatively correlated with GBP/NOK.

Going forward, we see some downside potential for GBP/NOK but the biggest move has probably been seen. We will await better levels before establishing a new short position.