EUR/NOK likely to trade around 9.20 on three-month horizon

The Norwegian krone is seen as a fundamentally cheap currency and the pair EUR/NOK is expected to trade lower on a six to twelve month horizon underpinned by the real yield spread, growth and oil prices, according to a Dankse Bank research report. However, the recent appreciation in the currency is overdone. It is quite possible that the currency pair is bound for a correction and would trade higher by the end of this year.

“We expect the cross to trade at 9.20 on a 3M horizon. We base our projection of EUR/NOK trading higher over the next few months on a number of factors”, added Danske Bank.

Firstly, the krone requires to be aligned to the continuously negative surprises given by Norwegian data in the past month that follow a series of positive moves in the summer. Price of oil has increased to USD 52 per barrel from about USD 46 since the OPEC nations agreed to cap their oil production in September. The NOK has been definitely underpinned by the increased oil prices. The market is believed to be quite optimistic on the OPEC deal as it might have slight impact and cut the overall output by just a small margin.

Moreover, there is still possibility of the U.S. Fed hiking its rate this year, which would be US dollar supportive but might weaken oil prices because of subdued growth outlook and a lower risk appetite.  A stronger dollar might also be a drag on oil prices. There is a risk of Brent declining to USD 46-48 per barrel in the near term. This signifies stronger headwinds for the NOK, stated Danske Bank.

Lastly, increasing NOK headwinds are expected due to seasonal impacts, which, along with usually low liquidity late in 2016, have historically tended to ease the NOK, added Danske Bank.