NOK flows: NOK higher after Norges Bank

A somewhat more hawkish than expected statement from Norges Bank has sent the NOK higher. Norges bank said in their statement that “the data so far could suggest that a tight monetary policy stance may be needed for somewhat longer than previously envisaged”. While they also noted that inflation has been a little lower than expected, they not that activity has been stronger and wage growth may turn out slightly higher than projected – considerations that suggests some upward pressure on inflation further out.

EUR/NOK initially around 4 figures on the announcement to 11.75. The market is still pricing in around a 73% chance of a rate cut by year end, but has reduced the probability from near 80%. Longer term yield spreads still suggests there is upside potential for the NOK based on recent correlations. Recent NOK weakness looks hard to explain, and the relatively low level and the carry advantage against the EUR suggests scope for EUR/NOK declines from here. NOK/SEK continues to look out of line as well, and given the historically very strong correlation with yield spreads, should have scope to challenge parity.