In the MPR from June, NB indicated a 100% probability of a September cut conditioned on its economic forecasts. Meanwhile, domestic developments have differed much from NB's projections, which we expect will have a substantial effect on its risk assessment.
We think NB will maintain an easing bias and be very cautious in not sending too hawkish a signal at this stage. Specifically, we expect the revised rate path to signal a roughly 50% probability of a December rate cut. Also we expect NB to reiterate the message from March and July on proceeding with greater care in setting rates.
Market pricing. We estimate that markets price in roughly 1-2bp for this week's meeting and around 9-12bp worth of cuts on a 12M horizon. While this is close to our own base-scenario call (albeit our call is somewhat more dovish), we must stress that we cannot rule out a rate-cut on Thursday as NB could reiterate its dovish message from June and highlight the implicit monetary tightening over the summer as well as global uncertainties.
FX strategy. If we are right in our call on the rate path and given current market pricing, an 'unchanged' announcement is unlikely to send EUR/NOK much lower. Our baseline case for EUR/NOK is that the cross will remain range-bound in the 9.15-9.35 range over the coming three months, but we see near-term risks skewed towards a breach of the upper limit.
FI and rates strategy. Risk-reward suggests to be positioned for lower Nibor interest rates going forward. In light of this, the current NOK 3M FRA DEC 2016 of around 0.99% seems too high. We suggest selling this contract outright (P/L 0.75%/1.10%) or relative to NOK 3M FRA DEC 2017. The current spread is -7bp (P/L 15/-15).
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