Norges Bank Preview 9 May 2016 Unchanged and a dovish bias; limited EUR/NOK upside Frank Jullum Chief Analyst +47 85 40 65 40 fju@danskebank.dk Jostein Tvedt Chief Analyst +47 23 13 91 84 jtv@danskebank.dk Kristoffer Kjær Lomholt Analyst +45 45 12 85 29 klom@danskebank.dk www.danskebank.com/research Investment Research Follow us on Twitter @Danske_Research Important disclosures and certifications are contained from page 5 of this report.
Main points At its meeting on 12 May we expect Norges Bank (NB) to leave the sight deposit rate unchanged at 0.50%. Thursday s NB meeting is a short/intermediate meeting in the sense that no monetary policy report is released. The focus will therefore be on the statement released and communication at the press conference. We expect NB to re-iterate its dovish bias from the March meeting but otherwise to deliver a balanced message. Since the March meeting we have had relatively few economic data releases out of Norway and the short-term outlook remains unchanged. While retail sales have been weak, thereby keeping the risk of a severe downturn in private consumption alive, unemployment seems to have stabilised and house price increases have been higher-than-expected. Core inflation has been roughly as expected. Foreign rates are marginally lower than projected in March but global financial conditions have improved somewhat. The key thing to look for at the May meeting will be how NB evaluates the trade-off between a higher oil price and the substantially stronger NOK. In this respect we expect a relatively balanced message on Thursday. Main risk factor. The largest risk factor is that NB expresses much lower concern as to the economic outlook given the latest oil price increase and/or that it steps up the rhetoric on financial imbalances given the latest house price data. As this would trigger a NOK-rally, and since NB over the last year has on several occasions expressed the need for a weak currency, we think this risk scenario is less likely. Also NB does not usually communicate large changes to their views at intermediate meetings. Market pricing. Markets have significantly repriced NB monetary policy over the last month. As such, markets now only price in slightly more than a full 25bp rate cut on a 12M horizon. For the May meeting in isolation only a few bp worth of easing is priced. FX. We expect EUR/NOK to remain little changed on the announcement with risks skewed towards a modest rise. We do not yet think the fundamental outlook for a massive NOK appreciation is present. In the short-term we recommend utilising spikes higher in EUR/NOK by increasing medium- to long-term NOK-exposure. Fixed Income. We expect slightly lower interest rates at the short end of the curve, which may suggest selling e.g. NOK FRA 3M MAR 2017. From a risk-reward perspective this strategy, however, seems more attractive ahead of subsequent NB meetings and the upcoming political risk scenarios (i.e. the Brexit referendum and a likely return of Grexit talks). 2
Decision: Norges Bank to leave rates unchanged We expect NB to leave the sight deposit rate unchanged at 0.50% and to reiterate its dovish bias from the March meeting Back in March NB cut the sight deposit rate by 25bp to 0.50% whilst presenting a dovish rate path suggesting a 100% probability of a rate cut before Q4 16 (conditional on economic projections materialising) together with a 20% probability of zero rates in 2017. Importantly, Thursday s meeting is a short/intermediate one in the sense that no monetary policy report will be released. The focus will therefore be on the statement released and communication at the press conference. Since the March meeting only few macroeconomic data releases have been released and the overall economic picture remains unchanged. While the latest releases point to a stabilising labour market, retail sales still leave open the risk of a more severe downturn in private consumption. On the other hand, housing prices have increased more than expected, reintroducing the risk of financial imbalances. The key thing to look for at the May meeting will be how NB evaluates the trade-off between a higher oil price and the substantially stronger NOK. Indeed from a historical perspective the last month s appreciation of the NOK would alone warrant close to a full rate cut. However, at the March meeting, we got a clear impression that the threshold for altering the rate path is becoming higher as rates are approaching zero. In short, we interpret the communication as implying that rather large deviations from the March outlook are necessary to alter the rate path. In sum, we expect NB on Thursday to leave rates unchanged and to reiterate its dovish bias from the March meeting. Given the economic outlook, NB s dovish rate path and the stronger NOK, we still expect a final 25bp rate cut in September. The import-weighted NOK is substantially stronger than assumed in March (negative) Source: Macrobond Financial, Danske Bank Markets which to a large extent is due to the higher oil price (positive) Source: Macrobond Financial, Danske Bank Markets 3
FX and FI/rates strategy EUR/NOK: limited upside in base case If we are right about our NB call, we expect EUR/NOK to remain little changed, with risks skewed towards a modest rise as NB communication could be interpreted as somewhat more dovish than expected by FX markets. Having said this, the outlook for a higher-than-consensus GDP print released at the same time will likely limit the upside potential. We do not yet think the fundamental outlook for a massive NOK appreciation is present and in the short-term we therefore prefer to remain sidelined spot/outright. Indeed NB could well remind markets of the need for a weak currency via a rate cut in September and possibly in June. In addition, a significant NOK appreciation could be characterised as the major shock that NB referred to in the March MPR as being a trigger of negative rates. Hence NOK rates limit the medium-term NOK upside potential. we recommend utilising spikes higher in EUR/NOK to increase medium- to long-term NOK exposure. Fixed income/rates We expect a very muted market reaction to the upcoming monetary policy board meeting. If anything, we may see slightly lower interest rates at the short end of the curve, which may suggest selling e.g. NOK FRA 3M MAR 2017. The current level is around 0.715%. Only two months ago the same contract was at 0.55%. Risk-reward for this strategy seems, however, to be limited short term (i.e. at the upcoming meeting), but may be an interesting trade ahead of the NB board meetings in June and September and ahead of the potential international political turmoil this summer (Brexit, Greece etc.). FX vol. Valuation*: Front (<3M) seems borderline cheap while the long end (>6M) seems borderline expensive *Based on our volatility model Source: Bloomberg, Danske Bank Markets 2W 1M 3M 12M EUR/NOK Neutral Neutral Neutral Expensive USD/NOK Neutral Cheap Neutral Neutral NOK/SEK Neutral Neutral Neutral Neutral NOK FRA 3M MAR 2017 1,4000 1,2000 1,0000 0,8000 0,6000 0,4000 0,2000 0,0000 jun-2015 sep-2015 des-2015 mar-2016 Source: Danske Bank Markets NOK FRA MAR 17 3m 4
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