As expected, Norges Bank kept rates unchanged at yesterday’s monetary policy meeting. The overall impression from the press statement and the briefing is that Norges Bank is overall happy with developments and we note that the central bank for a change did not twist everything in a dovish direction. In particular, we note the focus on the lower lending rates, which is quite interesting, as it feeds directly into a higher rate path. It might create speculation that we could see a small upward revision to the rate path when the next monetary policy report is published on 19 June. Norges Bank also notes the stronger housing market. On top of that, the probability of an ECB rate cut at the June meeting has gone up after yesterday’s ECB meeting. It has resulted in general weakening of the euro. Today, the NOK gained further tailwinds as Norwegian core CPI came out higher than expected at 2.5% (cons. 2.3%, NB 2.3%). Especially services with wages as the dominating factor, which was up 3.7% y/y, might be a bit of a concern for Norges Bank. This is the inflation that they can do something about and thus yet another argument why we could see an upward revision to the rate path next time.
All in all, we still look for a stronger NOK over the medium to long term, relative to the euro. However, the recent move lower in EUR/NOK now looks slightly overdone: our short-term financial model indicates that EUR/NOK is significantly oversold, trading 1.8 standard deviation below the model’s fair-value estimate of 8.250. Furthermore, the cross is starting to look oversold from a technical point of view. The so-called RSI indicator is currently close to 30, implying risk of profit taking in long NOK positions.
All in all, we have therefore decided to close the bearish risk-reversal that we entered in our 2014 FX Top Trades. We bought a 6M EUR/NOK put at 8.30 and sold a 6M EUR/NOK call at 8.70. The position was open with the spot at 8.4390 and can be closed with a profit of 1.97% (spot ref. 8.1380). We still like to be short EUR/NOK and if we see a new move higher in the cross we would consider a short spot position. The monetary policy outlook between Norges Bank and the ECB is currently divergent, especially as we expect more easing from the ECB at the June meeting.
Short USD/CNH stopped out on 21 April at 6.2680
As another one of our FX Top Trades, we recommended selling USD/CNH 12-month forward to position for a continued appreciation of CNY in 2014 and at the same time receiving an attractive carry. We recommended using the offshore CNH market instead of the non-deliverable USD/CNY forwards as the offshore CNH discounted the largest depreciation in the forward curve.
However, over the past couple of months, Chinese data has disappointed and consequently the People’s Bank of China (PBoC) has eased its monetary policy, which in turn has weighed on CNY and CNH relative to the US dollar. Hence, on 21 April, our short USD/CNH position was stopped out at 6.2680 (spot ref. 6.2300) with a total loss of 2.11%. Going forward, we expect USD/CNY to move sideways in the upper end of the daily trading band as long as the PBoC has an easing bias. However, more two-way volatility in the exchange rate should be expected, leaving the carry-to-risk profile less attractive, in our view.
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