Macro and Vol Commentary
As oil prices have weakened from the highs and the Fed raise rates, USDNOK has gained ground but will the production cut from OPEC+ give rise to NOK?
- Inflationary pressure continues to dominate the global economy, and CPI in Norway is 6.9% Y/Y but risen M/M by 1.4%, as of September.
- Transport, food and other household related expenses rallied significantly.
- Prices of food and non-alcoholic drinks increased by 12.1% and transport 11.3%.
- Household equipment increase to 7.6%; housing, water, electricity, gas & other fuels 5.8%.
- Fixed costs for households are higher, and we expect to see mortgage rates rise, putting pressure on the housing market. Rents are likely to increase if landlords must re-mortgage at a higher rate, compounding inflation.
- CPI adjusted for tax and energy products was higher at 5.3% Y/Y, but this was a new peak, up from 4.7% Y/Y.
- We expect the rise in mortgage rates, rents, food and electricity to keep CPI elevated despite the softer commodity and freight prices.
- Banks reported lower mortgage demand in Q3 2022, this is expected to decline in Q4
- Inflation has proved upwardly sticky, and the EU CPI electricity index for Norway has increased back to 235 (100=2015); the previous high was 307 from December 2021, and we expect this level to be surpassed.
- The most up-to-date data shows that industrial electricity prices for consumption between 2GWh to 20GWh stood at €0.1693/kWh as of June, but we expect this to rise for July and August, but September average prices have weakened.
- The average price from 8 am to 8 pm in Norway declined sharply in September to NOK231.53/MWh, down from NOK6452.60/MWh.
- Industrial production increased to 3.1% M/M in August and 4.7% Y/Y. PPI including oil has surged higher to 52.4%, but down 7.2% M/M. We are expecting the oil prices to remain high following the OPEC+ cut.
- Output for the past 3 months and 6 months fell compared to the previous reading, at 0.43 and -0.16. This highlights the weakening economy, and we expect headwinds to prevail.
- Regional network contacts have lowered their output growth expectation and low forward optimism.
- GDP was positive M/M at 0.3%, but the GDP mainland M/M was down 0.3%; both figures are lower. Higher gas and electricity prices are impacting household finances and business costs. Futures prices for gas and electricity are higher, and we expect the squeeze to continue soon.
- Activity in the economy still has a high frequency, but card transaction data fell in August, and the savings ratio has declined, and while household savings are high from a total value perspective, this will support underlying consumption.
- The labour market has shown consistent tightness, and employment is low, with seasonally adjusted unemployment at 1.6% in September. There are signs that the labour force is easing. Unemployment Rate AKU for August was 3.2%.
- Credit growth remains stable at 5.2% Y/Y, below the long-term average. Inflation is high, and we expect this to cause credit to grow, especially as the labour market cools.
- If unemployment increases, credit growth will push higher, even with higher household savings.
- The trade balance surged higher in August to NOK197.7bn, up from 153.2bm, this moderated in $122.4bn in September. Shipments in August surged to 143.6% Y/Y to NOK 287.8bn, and this was due to mineral fuels, lubricants & related materials at 199.2%.
- Imports rose at a slower pace as consumer spending started to slow, and this could keep the trade balance elevated despite the drop in oil prices.
- In the first eight months of 2022, the trade balance has increased 333.6% to NOK927.0bn; this puts the economy in a strong position due to low debt and high revenue.
- Crude oil production has been decreasing in recent months and stands at 8.74m m3, which is off the lows of 6.34m m3 in June. The long-term average remains at 7.7352m m3, and we expect production to remain elevated in the coming months.
- The Norges Bank raised rates from 1.75% to 2.25% in September, and the expectation is for another 50bps in November as inflation needs to decline.
- According to the bank, policy rates will move to around 3% next year, and the average interest on residential mortgages is currently 2.2%, which may increase to 4.3%.
- The O/N deposit rate is 2.25%, with the O/N lending rate at 3.25%.
- NIBOR rates for 1W, 1M, 2M, 3M, and 6M stand at 2.44%, 2.78%, 2.98%, 3.35%, and 3.92%, respectively.
- As a result, we expect the yield curve to flatten as front-end rates rise, but growth fears could prompt an inversion, but robust trade data boost Norway.
We expect the dollar to stay firm for the remainder of 2022, while investors expected the Fed to have a higher pace of rate hikes; in our opinion, they will remain committed to their course of 125bps. The implied rate change is 0.759% for November and 0.579% for December. The Fed futures curve shows May 2023 at a rate of 4.885%, the highest rate curve; we look for language from Fed minutes and speakers between meetings for a runoff period. Employment data is the key point to watch now, as any signal from the labour market will prompt further recession fears and may prompt a pivot causing weakness in the dollar. Inflation will start entrenched in the economy through higher mortgages, rent, lending, and wages. While this is the case for Norway, any downside to the dollar will prompt a significant correction, mainly due to the strong trade balance in Norway. Oil prices have edged higher, and the cut by OPEC+ will undoubtedly act as a tailwind. Dollar weakness in recent sessions is due to investors overpricing higher rates. The softness in USDNOK is a combination of higher rates being priced in for NOK and softer sentiment on the USD in the near term. We expect support between 10.09 and 10.30, the 50 and 100DMA. We think any dovish language from the Fed will see the dollar weaken, and as we approach the end of the rate hiking cycle the risk reward is working against the USD. We favour a knock in, with prices needing to hit 10.75 before prices weaken.
Sources: Statistics Norway, Central Bank of Norway, NAV, Eurostat
As we head into winter and the global economy continues to deal with continuously high energy costs, rising rates and heightened energy use into winter sees the US dollar continue to remain strong against most major currencies with USDNOK being no exception. Vols throughout the year have generally been realising higher than implied and in a risk off market and the Fed continuing to power ahead with rate increases we expect these trends to continue and favour positions that benefit from continuing USDNOK strength and higher volatility.
USDNOK 1-month Realised vs Implied
USDNOK Trade Idea
- Buy European Digital 3 month expiry, pay out 400k USD if USDNOK over 10.85 at expiry for circa cost 93k USD
- Sell USDNOK Put spread, 3 month expiry strikes 10.100 & 9.85 to rec circa 93k USD
- Total structure circa zero upfront premium
The options market saw more puts traded than calls, this suggests that consumers where either hedging their longs or opening downside speculative positions. Both indicate that the market forecasts a decline in USDBRL in the coming weeks, and months out to year end. In the near term options have a range of 4.85-5.50, but there is a strip of puts traded down to 4.55 due to expire before December 5th. The election will provide some volatility and could lead to BRL strength which has triggered downside cover.
USDBRL NDO Positioning Data 14/10/2022 - 28/10/2022
Options traded in the last week, has traded a wider range on the downside. Puts trade down to 4.70 and this suggests traders are expecting higher the BRL to strengthen. Expiry for the options with a higher notional value are due to expire in December. There is very little upside cover, and call options have a low notional value, some calls trade up to 5.90, there is a lot less conviction in trades.
USDBRL NDO Positioning Data 21/10/2022 - 28/10/2022
USDCNY Vanilla Positioning Data 14/10/2022 - 21/10/2022
Options traded continue to favour the upside, with larger notional values and a higher range. The market continues to expect USDCNY to strengthen, but we do see more puts traded. These puts trade to 7 in the near term but as we move into December. Positioning suggests higher prices, and with the Fed next week.
USDCNY Vanilla Positioning Data 21/10/2022 - 28/10/2022
USDNOK Vanilla Positioning Data 28/08/2022 - 28/09/2022
Options traded were lighter this week compared to the previous, but the move lower on spot has prompted more call options traded with an expiry before December. Call options trade with a higher frequency up to 11.50 and then we see one call option traded at 12. This could trigger spot to push higher as traders have gain upside cover. There is no cover above 11.50. There are some puts traded between 9.50-10.50. We expect to see a higher prices in the near term before selling off.
USDNOK Vanilla Positioning Data 28/09/2022 - 28/10/2022
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Key Events & Releases
JP Morgan Global FX Volatility
The index has deteriorated in recent days, breaking below the support of 12.00 and softening into 11.73. The stochastics are falling, with %K/%D diverging further into oversold, which means we could see a continuation of the trend before its reversal. Meanwhile, the MACD diff is negative and converging highlights a possible slowdown in downside momentum in the near term. The index needs to hold above 11.65 before it can retarget 12.00 and the moving averages. On the downside, the break below the near-term level could pave the way for 11.38. All three moving averages have been broken below, but indicators point to abating softness in the index in the near term, which could form support at current levels in the near term.
The dollar index has found some strength after finding support at 110 in the last couple of days; this caused the index to edge higher to 110.86. The stochastics are rising and are about to enter the overbought, while the MACD diff is positive and diverging on the upside, suggesting further upside momentum before the change of trend. For the appetite to return to the downside, the prices need to push back towards support at 109.71. If that level is breached, we could see prices lower at 109. In order to confirm the outlook of higher prices, prices need to take out 111 and the moving averages at 111.70 and 111.77. There has been an increased appetite for lower prices in recent days, and with the short-term moving average crossing below the longer-term one, the death cross, we expect temporary upside momentum to be capped by these levels.
The market has sold off in recent weeks as selling pressure prompted a break of support at 10.40. The pair then found support at 10.21. The stochastics diverge on the upside, and the MACD diff is positive and diverging. To confirm the outlook of higher prices and the rejection of the descending triangle prices need to take out the 10.35 and then the 10.40. This would also confirm the break of the moving average resistance. On the downside, if resistance at 10.35 stands firm, this could trigger losses back towards 10.19. A subsequent breach here would confirm the descending triangle, prompting a break to 10.00. Selling pressure in recent weeks has been waning, and we could see further upside.