New research from Danske Bank Markets
EUR/NOK has moved sharply lower over the last week on the rebound in oil prices and better than expected Norwegian data. Fundamentally, the NOK remains very attractive but a Norges Bank (NB) rate cut in March will temporarily weigh on the NOK as this is not fully priced in.
We expect oil prices to have bottomed out and regard the current market expectation of more than two NB rate cuts over the coming 12 months as too dovish in the longer term.
Consequently, we expect EUR/NOK to stall ahead of NB's meeting in March but head lower thereafter. We now target EUR/NOK at 8.65 (previously 8.75) in 1M and 8.50 (9.00) in 3M. On a 6-12 month horizon, we expect EUR/NOK to fall sharply as NB is re-priced, ECB QE is playing out and oil prices recover further. We target the cross at 8.25 (8.75) in 6M and 8.15 (8.25) in 12M.
Leverage funds should buy cost neutral 3M risk reversals in EUR/NOK. EUR- and DKK-based corporates should hedge short-term NOK income via FX forwards and long-term NOK income via knock-in forwards Short-term NOK expenses should be hedged via risk-reversals.
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