New research from Danske Bank Markets
As we expected, Norges Bank this morning left rates unchanged at 0.75%. However, the long end of the revised rate path was even more dovish than we had expected.
The revised rate path has a 100% implied probability of another 25bp rate cut in H1 16 and a 44% probability of an additional rate cut on a 12M horizon. The rate path implicitly suggests a 40-60% probability of a rate cut in March.
Market reaction : Prior to the decision, markets had priced in a 50% probability of a rate cut today. Post the decision short-term rates have risen and markets are now pricing in roughly 16bp worth of cuts for the next meeting (on 17 March) and roughly an accumulated 35-37bp on a 12M horizon, i.e. markets think the risks are skewed towards a cut earlier than pencilled in by Norges Bank.
Our expectation: Our outlook for the economy is a bit less pessimistic than that of Norges Bank. Hence, we expect it to stay on hold at the March meeting, although we cannot completely rule out a cut.
FX: Short term, we expect December liquidity, limited year-end risk appetite and the current supply-driven bearish oil environment to limit the NOK upside potential. From a long term perspective the NOK remains significantly undervalued and we should see a stronger NOK when the business cycle turns in 2016. We maintain our forecasts for EUR/NOK at 9.40 in 1M, 9.40 in 3M, 9.25 in 6M and 8.80 in 12M.
Fixed income: We see potential for somewhat higher rates at the short end of the swap curve
To read the entire report Please click on the pdf File Below
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