Norges Bank And Cyclical Recovery Make NOK Great Again

Fundamental analysis of Forex market

Market movers today

The main release today is the US PCE core inflation and real consumer spending for November. The PCE inflation is the measure the Fed is targeting.

Consensus looks for a small decline in core PCE inflation to 1.5% y/y from 1.6% y/y in October, still below the Fed’s 2% target.

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Euro consumer confidence is expected to move broadly sideways at a level above the long-term average as has been the case for the past year.

The UK House of Commons is set to vote on the Withdrawal Agreement Bill. It sets the end of transition at 11pm on 31 December 2020.

Swedish retail sales and wages as well as Norway unemployment are released.

Selected market news

Yesterday was packed with central bank meetings across Sweden, Norway and the UK. In global markets, we are seeing further tailwind to the well-beaten energy sector and a cyclical rotation that appears to finally be supportive of NOK strength. The fixed-income sell-off that has prevailed in the past days continued yesterday, leading to Bund yields touching new highs since the summer at -21.5bp and curves steepened across the euro area.

The Riksbank (RB) delivered on its ‘promise’ to hike to zero, probably one of the most expected moves ever. The RB, though acknowledging that growth is slowing, has a positive tone regarding both the global and Swedish growth outlook. The door has been kept open for rates to be cut should the outlook get murkier. Thus, there is no zero lower bound. In our view, a cut is more likely than a hike going forward, which should support EUR/SEK in 2020. We continue to see EUR/SEK at 10.50 in 1M and 10.60 in 3M.

As widely expected, Norges Bank (NB) kept policy rates unchanged, leaving the sight deposit rate at 1.50 %. The executive board also reiterated its ‘on hold’ stance and concluded that ‘the Executive Board’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at this level in the coming period’. We still expect NB to hike rates a fifth time, by 25bp, to 1.75% in 2020, but now expect this to happen in June versus a previous forecast of March. Upon announcement, EUR/NOK moved marginally lower still as the outlook for carry momentum has returned somewhat as a reason for being long NOK going into 2020. Further, across the board, energy-related credit, equities, oil price and NOK are starting to see some tailwind. We remain optimistic that EUR/NOK will retrace lower into 2020.

As expected, a majority of the policymakers at the Bank of England voted to keep the Bank Rate unchanged at 0.75%. The Bank of England repeated that it thinks GDP growth will ‘pick up from current below-potential rates, supported by the reduction of Brexit-related uncertainties, an easing of fiscal policy and a modest recovery in global growth’. While we agree we are about to see a modest recovery in global growth, we think UK growth will remain subdued for domestic reasons and thus expect Bank of England to cut interest rates in early 2020.