Date: 06 Nov 2017

Japan’s Nomura Bank feels that “NOK depreciation is already looking overdone after the significant oil price rally” and the Japanese firm thought on Friday there might be value in using a EURNOK put spread option structure to benefit from their hoped-for rise in the value of the Norwegian krona. Of course recourse to such structures isn’t an option (pardon the pun) for retail traders but the arguments that brought Nomura to their conclusion that the balance of risk favours a stronger Norwegian currency might nevertheless be of interest to those who do look at Scandinavian currencies. In the first instance the Japanese firm feels the Norges Bank, Norway’s central bank, “is highly uncomfortable with rates as low as they are. November’s Financial Stability Report continued to highlight vulnerabilities in the system, particularly in the housing sector. The Bank’s willingness to project below-target inflation through the forecast horizon suggests it is keen to raise rates in the coming years to prevent these imbalances building.” Extrapolating from that view Nomura adds that “arguably, this also makes the Bank less sensitive to dovish policy abroad (particularly the ECB) than other central banks such as the Riksbank.”

Additionally, Nomura feels “NOK pessimism is already at very high levels. The data surprise index is at a low, which has likely weighed on NOK in recent months. Meanwhile, the uptick in the manufacturing PMI in October is also good news, and our output gap estimates suggest slack in the economy is still reducing.” “This should push Norges Bank to raise policy rates in the next 12-15 months, with some risks to earlier given the Bank’s aversion to low interest rates,” Nomura argues, particularly as the Japanese bank thinks Norway is “likely approaching the lows in core inflation” and that “the fall in NOK should soon start to feed into higher import prices.” All in all, Nomura concludes that “asymmetric risks favour long NOK positions” especially as, in their view, “NOK depreciation is already looking overdone after the significant oil price rally” and that “like many euro crosses, EURNOK is also trading above where rates differentials would suggest.” The Japanese firm also thinks Norway’s currency could outperform its Swedish neighbour (NOKSEK). It remains to be seen whether or not traders will find those arguments persuasive.

Written by Neal Kimberley, External Currency Analyst.