NOK/SEK: Divergent themes emerging - Nomura

Analysts at Nomura note that NOK/SEK has recovered from the lows below parity in late December and they expect NOK outperformance to continue towards 1.05, with the macro narrative starting to diverge between the two currencies.

Key Quotes

“Higher oil prices and separating growth paths

• Oil prices have staged an impressive recovery since mid-June. As we have argued previously, NOK should still benefit from the positive terms-of-trade shock and a more supportive flow backdrop. Meanwhile, there are also signs of accelerating growth momentum in Norway. Norway’s manufacturing PMI registered an impressive 59.0 in January, from an upwardly revised 58.1 previously. Higher oil prices have likely helped improve sentiment.
• The picture is the opposite for SEK, which has not experienced such a positive terms-oftrade shock. Despite sturdy external demand, survey indicators suggest Swedish growth is starting to moderate. In yesterday’s PMI release, there was a noteworthy decline in new orders, while inventory accumulation continued. Historically, this has been a bearish signal for Swedish growth momentum. Growth in Sweden has been forecast to slow by the Riksbank and consensus for some time, but recent data are unlikely to bring much cause for optimism, particularly with the housing outlook remaining uncertain.”

“Housing market stabilising in Norway – while uncertainty remains in Sweden

• The market was late to catch on to falling house prices in Norway. The bulk of the declines were in late Q2 2017 and the housing market has already shown signs of stabilisation. Meanwhile, the housing trough in Sweden is deepening.
• We continue to believe that the Swedish economy will be able to withstand a housing market slowdown relatively well. However, we think current forecasts are too optimistic given the extent of housing market declines so far. This puts downward risks on the Riksbank repo rate projections in our view, and we are sceptical whether the Bank will find the courage to hike in Q3 2018 as currently projected and priced by the market.”

“ECB dovishness spills over to the Riksbank not Norges Bank

• Recent ECB communication has shown a divergence within the Governing Council between the hawks and the doves. Bloomberg reported that some ECB officials would like to see a small amount of tapering before the APP is terminated, suggesting that purchases may see a modest extension beyond September 2018. Though still not our base case, this could marginally push back the market pricing for rate hikes further into 2019.
• The Riksbank currently forecasts hikes in Q3 2018. We are sceptical about the Riksbank’s willingness to hike so far ahead of the ECB, particularly if growth and housing market concerns linger. Governor Ingves reiterated on Wednesday that the Riksbank will be affected by what the ECB does. While some divergence is warranted by domestic fundamentals, we still believe that a majority of the Riksbank board judges the risks of low inflation to be much greater than the risks of high inflation. Thus, we think the board will remain wary of SEK appreciation.
• Norges Bank is much less dependent on ECB policy. Norges Bank places more weight on financial stability risks than Sweden, as evidenced by forecasting inflation below the 2.5% target over the entire forecast horizon into 2020. We still believe Norges Bank is highly averse to low rates, and would remove its post-oil-shock stimulus if the opportunity presented itself.”

“Upside risks for Norwegian inflation

• Swedish inflation has already seen a significant recovery through 2017. While upward pressures could continue, the Riksbank remains more sensitive to negative inflation surprises than positive. This means the risk-reward is against positioning for more hawkish communication than currently priced.
• Meanwhile, we think the turn in Norwegian inflation will be the bigger story this year. Domestic core inflation pressures are rising. Meanwhile, the NOK depreciation so far should boost imported inflation in the coming prints. Most importantly, Norges Bank is much more likely to react proactively to an improving domestic outlook than Sweden.”