NOK: Revived interest – Deutsche Bank

Robin Winkler, Strategist at Deutsche Bank, suggests that a stronger-than-expected Norwegian GDP print last week has revived interest in the NOK, but they remain sceptical that NOK can participate in the upside they've projected for SEK, not least against the EUR.

Key Quotes

“First, the oil sector is likely to remain a headwind. Hurricane Harvey notwithstanding, our commodity strategists see no more upside in Brent this year, and if anything the NOK TWI is already trading rich to spot prices. Domestically, not only was last week's oil and gas investment survey disappointing with a view to 2018, there is also a growing risk of politics becoming a source of uncertainty for the energy sector. Based on current polling for the election on September 11, it is likely that any parliamentary majority will depend on the support of at least one of three small parties that demand radical cuts to Norway's petroleum production and exploration activity. This structural dimension to Norway's political uncertainty in the autumn should make it harder for the Norges to turn more hawkish before next year than it is for the Riksbank.”

“Second, value is often cited as a reason to buy the NOK, but it is more expensive than it looks on standard PPP models. For small open economies, consumer prices can be misleading indicators of domestic cost pressures. Calculating PPP with unit labour costs instead suggests the NOK is not 10% undervalued but 5% overvalued. The SEK, by contrast, is 10-15% undervalued on either measure, and is also cheaper on our more elaborate BEER and FEER models.”

“Third, long positioning is likely heavier in NOK. While the past year has seen equal net buying of both Scandies on our CORAX indixes, the structural build-up in NOK longs has been going on for more than a year. On our preferred positioning indicator based on Norges data, the sharp paring of NOK longs in the spring has also more than reversed over the summer.”

“In sum, we continue to prefer EUR/SEK shorts to capture good Scandinavian growth and target parity in NOK/SEK.”