EUR/NOK gains on table ahead of EIA’s stock plunge but NOK gets impetus from GDP growth in long run

Norwegian GDP growth is likely to moderate further in Q3, to 0.1%. Norway's near-term growth outlook remains vulnerable.

Oil investment is expected to fall further, and less demand for goods and services from the petroleum sector will likely reduce activity in other parts of the economy.

We do not expect the Norges Bank to react to additional ECB stimulus, but forecast a 25bp rate cut in the next 3-6 months should growth moderate further.

Despite the grim short-term outlook, expansionary fiscal and monetary policies in Norway should help stabilize growth.

While oil prices will dictate the short term moves in EUR, the longer term NOK outlook will depend on the lasting effects of lower oil prices to domestic drivers. The appreciation in NOK in H2 2014 has underpinned crude prices, inflation but growth and lower domestic demand will drag prices lower once the FX effect starts to wane.

But the forecast for today's EIA's crude inventory checks to contract to 2.0M from previous 4.2M. As such, we are cautiously constructive on NOK and believe EUR/NOK can drift lower once oil prices are able to find a stable floor.

We see EURNOK depreciating to 9.20 by year-end and trading modestly lower, to 9.00, by Q4 2016.

Hence, only a material recovery in oil prices is likely to stop those cutting rates to new historic lows. While this risk overhangs, we maintain a negative stance on the currency, with EUR/NOK expected to retest the recent highs around 9.25 levels.

But mind this is certainly not a buy, instead use rallies to short for targets at 9.20 and 9.00 levels back again.