Norges Bank's (NB) FX transactions statistics just released show that foreign banks (proxy for speculative flows) net sold the Norwegian currency for the second consecutive week. While the previous weeks net selling was only marginal (Chart 1), last week's NOK sale amounted to NOK14.8bn - the largest single week net NOK selling since September 2014.
The significant selling pressure last week was likely to be a result of the disappointing retail figures out of Norway, which led markets to question the robustness of private consumption in holding the Norwegian economy above water. Rates markets reacted to the release by pricing in a couple of basis points worth of extra rate cuts from NB so that 7bp is now priced in for the December meeting and 31bp on a 8-14M horizon (the period where the most easing is priced in).
Going forward, tomorrow's NB meeting will take centre stage: we expect NB to leave rates unchanged (0bp is priced in by markets), to reiterate its September easing bias but that the statement is otherwise balanced with no clear signals that the bank is planning to cut in December (for more details see: Norges Bank Preview - Rates unchanged: easing bias reiterated , 2 November 2015). We expect EUR/NOK to remain little changed on the announcement. Otherwise, we do not expect a NOK appreciation trend to materialise until the Norwegian business cycle turns and NB can signal that there is no longer a need to cut rates further. In our view, this will first be a story for 2016. We target EUR/NOK at 9.30 in 1M, 9.30 in 3M, 9.25 in 6M and 8.80 in 12M.
According to our microstructure model on FX flows, the NOK is 5% cheaper than a historical/statistical relationship suggests, thereby highlighting the rise in the NOK liquidity risk premium over the past year (Chart 2). With stretched short-speculative NOK positioning this will eventually constitute a NOK positive in 2016.
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