Historically, one of the most important factors for changes in Norges Bank's (NB) expected rate path has been the NOK via the I44-index. A marginal analysis suggests that a 1% change in NB's short-term I44 forecast affects the rate path by 7-8bp for the following two quarters. Below we replicate NB's short-term FX models that are used to forecast the I44-index.
We find that while the current I44 is close to NB's Q2 projection, NB's short-term models suggest that the NOK is weaker than current fundamentals justify. This is consistent with NB not mentioning the I44 in the May policy statement despite the - at the time - significantly stronger NOK.
We do not expect any major changes to the I44 index in June but our analysis suggests that risks are skewed towards a forecast of a stronger NOK. In isolation this would contribute to a 7-8bp lower rate path for the coming quarters.
We expect NB to cut the deposit rate by 25bp on 18 June due to a general weaker economic outlook. Markets have not yet fully priced this in.
We expect EUR/NOK to trade with a bid tone ahead of the June meeting and raise our 1M forecast to 8.65 from 8.55. Post June, we expect the NOK to strengthen and now forecast EUR/NOK at 8.45 (previously 8.40) in 3M, 8.25 in 6M and 8.15 in 12M.
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