Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Norges Bank Preview: “Normalization” Imminent, Implications For USD/NOK

Published 16/06/2021, 06:59
Updated 09/07/2023, 11:31

With most major developed central banks only just starting to “talk about talking about” normalizing monetary policy (see our full FOMC meeting preview for more), the Norges Bank is poised to fire a potential “shot heard ‘round the world” this week.

Between a relatively well-managed response to the COVID pandemic and oil prices rallying to 2+ year highs, the oil-dependent Norwegian economy is recovering faster than many of its peers. Indeed, last month’s Regional Network Survey in the country showed a sharply accelerating growth outlook with businesses expecting “substantial output growth ahead” across all sectors. The report also revealed plans to increase investment and employment in addition signs of rising cost pressures. In other words, the Norwegian economy is humming along a poised to accelerate over the coming months, raising the risk that the Norges Bank’s crisis-driven 0% interest rate is too easy and risks creating detrimental inflation.

Heading into Thursday’s meeting, traders and economists are expecting the Norges Bank to lay the groundwork for a rate hike at its September meeting, which would make it by far the first central bank in the G10 to start normalizing monetary policy. Perhaps more importantly for markets, the bank could hint that it plans to embark on a cycle of rate hikes, with another raise possible as soon as December if the economy remains strong.

Technical view: USD/NOK

As any new FX trader quickly learns, changes to central bank interest rates are arguably the biggest catalyst for currency market moves. While Governor Øystein Olsen and Company haven’t been shy about communicating their desire to normalize policy in recent months, the stark contrast between an imminent rate hike (or two) from the Norges Bank and the rest of the developed world unlikely to raise interest rates until late 2022 at the earliest could still boost the NOK against its rivals.

Technically speaking, the Norwegian krone has been the second-strongest major currency so far this year, behind only the similarly oil-driven Canadian dollar. Looking at the USD/NOK chart, rates formed a double top in Q4 of last year and have been trending gradually lower (showing NOK strength against the USD) ever since. The pair remains below both its downward-trending 50- and 100-day EMAs, and the slight recovery over the last six weeks appears corrective, rather than marking an end to the longer-term bearish trend:

USD/NOK Daily Chart

If the Norges Bank does strike a hawkish tone and hint at multiple rate hikes this year, USD/NOK could resume its longer-term downtrend. In that case, more aggressive traders may want to consider short positions on a break of last week’s low near 8.25 for a possible continuation toward 8.00 in time. Conversely, even if the Norges Bank is more cautious than some expect, prolonged weakness in the NOK (strength in USD/NOK) is seen as unlikely given the high likelihood that Norway will embark on the path to monetary policy normalization far sooner than its major developed rivals.

Original Post

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.