Currency Forecast - NOK: Modest Upside Amid Steady Oil And Rates - SEPT 2015


BMI View: We forecast the Norwegian krone to appreciate slowly over a multi-year horizon, with oil prices stabilising and the Norwegian central bank refraining from cutting rates further.

Short-Term Outlook (3-6 Months): The krone has weakened since the beginning of July due primarily to the renewed downturn in oil prices, but our oil and gas team sees USD45/bbl as a key level of support for Brent crude, and projects prices to average higher in 2016 than 2015. The September 24 Norges Bank rate-setting meeting is likely to be the biggest near-term driver of the krone, and since we anticipate that the bank will hold rates rather than cut as is priced in by markets, we expect some near-term NOK upside against the euro. Krone appreciation will be capped at the long-term resistance level of NOK8.50/EUR.

Long-Term Outlook (6-24 Months): We forecast modest upside for the krone from spot levels, averaging NOK8.75/EUR in 2015, NOK8.60/EUR in 2016, and NOK8.50/EUR in the long run. The main factors driving the krone versus the euro are oil prices and interest rates (specifically, the rate differential with the eurozone). A simple model of the exchange rate using Brent crude oil prices and the 2-year interest rate swap differential with the eurozone suggests that the krone is trading slightly on the weak side at NOK9.04/EUR. Assuming oil prices remain at spot levels and the swap rate differential remains the same, the cross-rate should be trading closer to NOK8.95/EUR; under BMI's core outlook, the Norwegian interest rate cut that is currently priced in will not materialise, and oil will return to around USD60/bbl through 2016 versus around USD50/bbl at present, which combined points to an exchange rate of NOK8.60/EUR.

Technical Room For Modest Appreciation
Norway - Exchange Rate, NOK/EUR
Source: Bloomberg, BMI

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