Since Friday morning the NOK has weakened roughly 1.5% vis-à-vis its European counterpart. The move is significant as the ECB started its bond purchase programme on Monday, which has sparked a new round of EUR weakness against most other currencies.
Our FX short-term financial models suggest that the move higher in EUR/NOK since Friday has been driven by the long rates spread and not least the oil price drop this week (see chart 1). More specifically, our models suggest that roughly 50% of the increase in the cross this week was the result of the oil price moving lower on the back of a stronger USD, general risk-off sentiment and renewed focus on the high oil inventories. The move higher can also be attributed to Norwegian rates falling more than euro-zone rates. Noteworthy, the short NOK rates have dropped but it is particularly the drop in the long end of the Norwegian curve that has weighed on the NOK according to our models.
We expect the short-term EUR/NOK risk to remain on the upside as we see limited short-term upside potential in the oil price. We also expect Norges Bank to cut rates by 25bp and to keep its current soft stance at the monetary policy meeting on 19 March, indicating a relatively high probability of another rate cut over the summer.
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