Macro and Vol Commentary
The Norwegian krone was one of the worst-performing G-10 currencies this year but started stabilising against the euro in recent weeks. Given the central bank’s decision to pause monetary tightening last week, what’s the outlook for the krone?
Norway
- Recent data from the wealthiest Nordic economy point to a gradual cooldown. Mainland gross domestic product, which excludes Norway’s largely petroleum-based offshore sector, shrank 0.2% MoM in August. The contraction reversed a 0.2% growth recorded the month before.
- Wholesale and retail trade contributed most to the fall. Household consumption decreased as consumers pulled back spending amid higher prices and credit costs.
- Retail sales fell for a third consecutive month in September by 0.3% MoM driven by decreased spending on large durable goods.
- According to DNB Bank ASA data, the country’s largest lender, its customers reduced card spending in September by the most since early 2021. - In Q3’23, consumer confidence stood close to historical lows recorded at the start of the year as rising costs of living have made Norwegians pessimistic about the future. The index improved slightly since reaching all-time low of -36.8 in Q1’23 but remains below -30.
- While the manufacturing sector rebounded in September from 51.2 to 52.5 driven by increased production and employment, new orders continued to decline.
- In line with other Western economies, labour market remains tight. Unemployment inched down in September from 1.9% to 1.8%, pointing to the lowest level in three months.
- Wage growth continued to gain ground with the latest reading at 5.06% YoY in June. - CPI data released in October pointed to a larger-than-expected softening in price growth, easing upward pressures on interest rates.
- Headline inflation slowed to a 20-month low of 3.3% YoY as housing, water, electricity, and other fuel prices fell 4.9% from September 2022.
- Core inflation stood at 5.7% YoY compared to a 6.3% YoY reading in the previous month.
Norges Bank & European Central Bank
- After raising the deposit rate thirteen times since September 2021, the central bank announced a pause in monetary tightening at their latest meeting this week. Softening inflation combined with weaker GDP figure increased likelihood of the Norges bank ending its monetary tightening campaign.
- Nevertheless, persistently tight labour market and strong wage growth continue to create upward pressures on inflation, leading the central bank to keep one more interest rate hike on the table.
- The policymakers indicated that a further rate increase of 25bps was likely in December. Currently, the forward swaps are pricing in 44% chance of a rate hike in December.
- At the same time, the latest ECB meeting at the end of October marked the end of the prolonged monetary tightening cycle in the Eurozone.
- The markets are not expecting any more rate hikes and the question now is how long the central bank will wait before implementing first cuts.
- The first ECB cut is unlikely to materialise before the second half of 2024.
The Norwegian krone has been one of the worst performing currencies in the last 12 months. The surge in oil prices following the Hamas attack on Israel and increased fears over the security of supplies have not stopped the currency from depreciating against the euro. As central bank moves continue to drive the sentiment for the pair, expectations of another hike from the Norges bank could help create resistance for EURNOK in the near term. Nevertheless, weak economic data and inflation below Norges Bank’s view puts Norges Bank’s December hike in question, driving the EURNOK pair up. As the central bank remains data dependant, volatility is set to remain high. For the 2-month outlook horizon, our view is for the currency to drift towards the 12.00 level.
(Sources: Statistics Norway, Central Bank of Norway, NIMA/DNB Markets, European Central Bank.)
Volatility Comment
Norway left its benchmark rate unchanged last week at a 15 year high of 4.25% despite the market pricing 50% chance of a hike. The rate hike expectations have eased over the past few weeks as underlying inflation has shown signs of declining. In addition, recent data has been on the weak side resulting in a weaker GDP outlook.
Some of the Krones weakness is due to the slower tightening vs other economies increasing the likelihood of needing to stay higher for longer to control the currency weakening further. However the benefits will not be achieved until the latter end of 2024.
With the recent data out of the US and the technical outlook in EURUSD shifting toward a positive bias, we prefer to enter into a short NOK view against the EUR.
We are looking for a continuation of NOK weakness breaking above the double top formation at 11.90, which may lead to an increase in volatility and momentum towards 13.00. Current implied vols have ticked lower so we are pricing a structure to go long vol alongside being long the currency pair.
EURNOK Trade Idea
- BUY EUR call spread
- 2 month expiry
- BUY EURNOK 11.90 CALL
- SELL EURNOK 12.30 CALL
- PAY 0.934 % EUR
Positioning Charts
EURUSD NDO Positioning Data 24/10/2023 - 31/10/2023
EURUSD option positioning pointed to shift on the upside in the week ending November 7th, with both upside and downside cover extending to 1.02 and 1.10, respectively. Still, the number of puts is now exceeding the calls, which could mean the case for a trend reversal in the near term.
EURUSD NDO Positioning Data 31/10/2023 - 07/11/2023
USDCNY Vanilla Positioning Data 24/10/2023 - 31/10/2023
Appetite for USDCNY option positioning grew in the week ending November 7th, with covers narrowing closer to the average, suggesting a lack of impetus in either direction. The number of puts and calls are now broadly equal, however, the near-term is more skewed on the downside.
USDCNY Vanilla Positioning Data 31/10/2023 - 07/11/2023
EURNOK Vanilla Positioning Data 24/10/2023 - 31/10/2023
EURNOK positioning shifted strongly in the week ending November 7th, with the nearby positioning taken out of the market and bigger positions are seen expiring next week. The number of puts is exceeding those of calls, suggesting that the case for the downside is growing in the near term.
EURNOK Vanilla Positioning Data 31/10/2023 - 07/11/2023
Charts and Tables
FX Expiries
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Weekly Change
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