NOK on a slippery slope, but is it over?

Commodity currencies are undoubtedly out of favor, and NOK has been feeling the pain since oil prices began their plunge late last year. After a brief respite, oil resumed its downward trend in July as seasonal support faded and markets began to contend with the new realities of an Iran deal increasing supply, and China growth concerns potentially decreasing demand. 

The Liquid Cross Border Flows report shows investors withdrawing money from commodity funds and persistently sellingcommodity currencies and EM. 

"In the case of NOK, however, while oil is a key determinant of the exchange rate, NOK has already weakened substantially, arguably removing the urgency for the Central Bank to cut rates further in September despite the fall in oil prices", says Bank of America. 

While it is difficult to make a case to be bullish NOK in the short term given the oil price trajectory and the Central Bank's dovish stance, valuation suggests some room for correction and inthe medium term NOK looks fundamentally supported as Norway still has a strong external balance.

"Either way, September should bring further clarity, with rate decisions from the Fed, ECB, Riksbank and Norges Bank, and an update on the oil investment outlook for Norway, as well as further data showing how the economy is dealing with the lower oil prices. September is shaping up to be a very interesting month even, or perhaps especially, beyond the majors", added Bank of America.