We have been stopped out of our short EUR/NOK position
Norges Bank, Greece risk-off and oil drop cause spike higher
NOK remains cheap but we prefer to stay on the sideline for now
Unforeseen perfect storm causes NOK loss
In June we recommended shorting EUR/NOK (see Danske Bank FX Trading Portfolio – Sell EUR/NOK, 2 June 2015). This position has suffered from a series of events driving a perfect storm, ultimately leading to the position getting stopped out this morning.
First, a significantly more dovish Norges Bank (NB) on 18 June than both we and markets had expected has driven a re-pricing of Norwegian monetary policy. Secondly, oil prices have fallen almost 10% on the back of renewed focus on excess global supply, Grexit-related worries about European demand, speculation about an Iranian nuclear deal and a sell-off in Chinese equities sparking worries on Chinese demand. Thirdly, the sell-off in eurozone core fixed income markets was amplified by poor market liquidity which has driven EUR-crosses higher. Fourthly, the correction in equity/bond markets reversed the hedging flows from non-EUR denominated investors leading to outright EUR buying. The higher EUR volatility has also reduced the EUR’s status as a preferred funding currency.
Where to go from here
The NOK is no longer the safe-haven currency that it was a few years ago and according to our models we find a considerable risk premium embedded in the Norwegian currency. This result is also in accordance with our own findings in FX Edge – Replicating Norges Bank’s short-term FX models, 1 June 2015, and NB comments in the June Monetary Policy Report. With respect to relative monetary policy the re-pricing of NB has been aggressive, and derivatives markets are currently pricing in more than a full H2 25bp cut. In addition, we still expect ECB QE to weigh on the single currency. Adding to this, positioning data suggests considerable upside potential in the Norwegian currency when sentiment changes (Chart 2). Finally, we maintain the view that the NOK fundamentally looks very cheap (Chart 3) with our PPP-model suggesting a long-term fair value of 8.21.
However, given the current poor liquidity in NOK and the fact that the spike higher has sent EUR/NOK into technically uncharted territory (see Chart 4 and Danske Technical Update), it is difficult to call the upside in a risk-off environment. Consequently, we prefer to stay on the sideline for now but will look for opportunities to re-sell the cross.
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