FxWirePro: Cyclical hedging of Norwegian krona on disappointing developments

We are downgrading the cyclical outlook for NOK this month following a number of disappointing developments.

These range from the renewed volatility in the oil price and attendant risk that the OPEC production agreement could collapse under the weight of cheating by the end of the year, to a surprisingly dovish shift in the Norges Bank’s forward guidance at the March MPR.

There’s still a valuation presumption in favour of NOK appreciation – the NEER is 11% below its 20Y average, so one of the cheaper major currencies - but it’s unrealistic to expect valuation to deliver a powerful re-rating of the currency in the absence of a defined cyclical catalyst.

We consequently raise EURNOK forecasts are above 9.22 in 1 month and 9.50 by end of Q2’2017 and the forecast for EURNOK from 8.80 to 8.90 by mid-year and from 8.60 to 8.80 for end-2017.

Driving forces:

We could still foresee the NOK as weaker than implied by fundamentals. Higher oil prices should continue to support the NOK going forward.

NOK has failed to catch up with higher interest rate differentials, and we see Norges Bank having come to the end of the easing cycle.

According to the above forecasts, Norwegian importers are advised to hedge using flexible forwards, while exporters are advised to choose 3m forwards.

Alternatively, at spot reference: 9.1127, one can also deploy diagonal credit put spreads by writing 2m (1%) in the money put while initiating longs in 4m at the money put, the structure could be constructed at net credit.