Short EUR/NOK in 2018 – Danske Bank

Analysts at Danske Bank find a fundamentally compelling case for shorting EUR/NOK and suggest that the biggest risk factors are China and Norway housing failing to stabilise.

Key Quotes

“Positioning, valuation, rates, terms-of-trade to weigh on cross

• We have argued that the balance of risk was to the upside for EUR/NOK going into yearend as seasonality and positioning left the NOK vulnerable to negative news. While positioning is now much more balanced, we expect worsening liquidity to remain a headwind for the NOK in December. Meanwhile, this does not mean the NOK cannot strengthen in the final month of the year and, paradoxically, over the past month the fundamental case for a lower EUR/NOK in 2018 has, in our view, actually improved.
• First, the past month’s data releases have been comforting in significantly reducing the downside risks that appeared in September and October. The Q3 GDP numbers confirmed the growth picture is now much broader based, with private consumption a key growth driver, which is arguably a significant difference from 2016, when housing investments and public consumption drove growth. As we regard the NOK to be fundamentally heavily undervalued (on PPP) (for good reason given the Norwegian economy’s need for a weak currency due to lower oil prices), this suggests correction potential in 2018 amid higher growth.
• From a Norges Bank perspective, the import-weighted NOK is now 5% weaker (average 2%) than pencilled in September, which alone would argue for a 15bp higher rate path. Also, our rates strategists point out that USD liquidity is likely to become a supportive factor for Nibor fixings in 2018, meaning that even if we do not pencil in a Norges Bank rate hike before Q4 18, relative rates are likely to drag EUR/NOK lower in 2018. In addition, the NOK has not yet reacted to the higher oil price, we think external drivers can explain the lower correlation. If we are right, these factors should prove temporary, leaving Norway with a significant positive terms of trade shock not yet reflected in the currency.”

“Short EUR/NOK on rates, valuation and terms of trade shock

Meanwhile, with rising consumer confidence, falling unemployment and private consumption holding up, there is little evidence that the house price fall should have a significant spill over onto the NOK. In summary, we find a compelling fundamental case for selling EUR/NOK. Given the NOK’s vulnerability in December, we prefer to express this view via options but we do highlight that given the latest spot move, this view may also be considered spot outright. The biggest risk factors for this trade are the developments in China weighing on commodity currencies for longer than expected and, if we are wrong, on the Norwegian housing market.”