We expect Norges Bank (NB) to leave rates unchanged on Thursday but Governor Øystein Olsen to maintain a strong easing bias.
We expect NB, either in the press statement or in the Q&A-session, to confirm that the MPC actually discussed a rate cut as an option.
NB's rate path from the March meeting included a 25bp cut in Q2. We expect this cut at the 18 June meeting.
Market reaction: marginally higher money market rates but nothing dramatic given the recent move higher in money market rates and that we expect the market to price in a rate cut at the June meeting.
Importantly, we think market participants underestimate the risk of NB cutting rates on Thursday. We see risks a lot more balanced between May and June than market pricing suggests.
Fixed income strategy: we see downside risk to rates here in Q2, as we believe the market will continue to price in rate cut(s) in Norway. Therefore, we recommend receiving NOK 1Y1Y swap outright as the market is now not even priced for a full rate cut in Q2 and as the market is priced above the NB rate path in 2017-18.
FX outlook: we expect EUR/NOK to rise into the NB meeting but to fall temporarily on the 'unchanged' announcement. We remain medium- to long-term bullish on the NOK. We lower our 1M and 3M (NYSE:MMM) EUR/NOK forecasts by 10 figures to 8.55 and 8.40, respectively.
FX strategy: We recommend leveraging funds to buy 3M NOK/SEK risk reversals (RR). Corporates should hedge NOK income via option structures and NOK expenses via FX forwards.
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