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The forecast envisages a second successive year of NOK appreciation, albeit at 5% the magnitude of the move is expected to be somewhat less than in 2016. The year-end forecast for EUR/NOK is pinned at 8.60.
NOK broke its three-year losing streak last year as the threat from oil prices and easier monetary policy receded. The TWI appreciated by 7%, reversing one-third of the decline in the prior three years.
We expect a continued, albeit moderate, recovery in the krone this year as oil rebounds towards $60, the economy slowly heals, the Norges Bank holds policy steady, and the risk premium in NOK continues to contract. Underlying balance of payments trends remain favorable.
Well, in a nutshell outlook for 2017, we included a number of protectionist hedges in G10 commodity currencies and we remain comfortable with both of these positions even though they are marginally in the red (short CADNOK in cash and short AUDJPY through a 3Mx6M calendar spread of one-touch puts).
Stay long NOK vs EUR and CAD We continue to recommend NOK longs as an outright play on stronger oil prices and the ongoing improvement in the outlook for NOK rates (EURNOK) as well as an oil-neutral hedge to potential trade conflict under the incoming Trump Administration (CADNOK).
NOK is the second strongest performer in G10 since December 16 (up 2.2% versus USD) yet it has plenty of headroom still to rally as it remains markedly undervalued relative to cyclical drivers.
Fair-value for EURNOK currently stands at 8.72; the resultant 3% undervaluation of NOK is amongst the more extreme of the last five years.
