EUR/NOK has spiked significantly higher in move resembling the Dec 14 sell-off
Our short-term financial model explains only 60% of the move. This suggests that the remaining 40% is due to an increased liquidity premium.
Relative fundamentals, positioning and models suggest downside in EUR/NOK from the current level but we do not want to try to catch the falling NOK knife.
Markets underestimate the effect of the significantly weaker NOK on Norges Bank's (NB) monetary policy and we find market pricing of NB excessive.
We raise our EUR/NOK forecasts to 8.90 (from 8.65) in 1M, 8.70 (8.50) in 3M, 8.50 (8.25) in 6M and 8.40 in 12M.
FX strategy: Leveraged funds should stay sidelined for now but should look to sell EUR/NOK when markets calm/oil price stabilise. Corporates should lock in NOK expenses at current levels via FX forwards.
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