Investment Research
15 April 2015
FX Strategy
EUR/NOK fall seems overdone

EUR/NOK has moved sharply lower over the past week. The main drivers behind
the move are the recovering oil price, a repricing of short-term Norges Bank
monetary policy, the long-end NOK-EUR rates spread and general EUR weakness.

Near-term, EUR/NOK may undershoot on technicals and light positioning.

However, our short-term financial models suggest that the move lower is
overdone. Near term, more volatility in the oil market and more aggressive
pricing of Norges Bank are likely to send EUR/NOK higher in the coming
month, towards our 1M target of 8.65.

Medium term, we remain bullish on the NOK. We expect an oil price recovery,
interest rate differentials and ECB QE to drag EUR/NOK lower towards 8.25 in
6M and 8.15 in 12M.
Chart 1: EUR/NOK has breached
important technical levels
EUR/NOK
9.4
Chart 2: Long rates and oil price have
been important drivers
1.0%
200D MA
9.2
0.0%
9
8.8
-1.0%
8.6
8.4
-2.0%
8.2
Oct-14
W-13
Nov-14
Dec-14
Jan-15
Feb-15
W-14
2Y swap spread
Mar-15
Source: Bloomberg, Danske Bank Markets
10Y swap spread
W-15
Vix
Oil
W-16
European sovereign spread
Source: Bloomberg, Danske Bank Markets
EUR/NOK has moved lower
Over the past week, the cross has moved sharply lower, breaking the important technical
level of the 200-day moving average yesterday. If we turn to our short-term financial
regression models, the move lower has been driven by the long end of EUR- and NOKrates rates and the oil price recovering following the Iranian nuclear negotiations driven
dip around Easter. In particular, we have seen a significant repricing of Norges Bank
monetary policy in recent days, which has contributed to sending EUR/NOK lower. In
addition, IMM data reveal that speculative EUR positioning is at a historical high
suggesting that investors continue to look for opportunities to sell the single currency.
Chart 3: Norges Bank repricing from
Monday...
1.40%
1.25%
1.40%
1.25%
Norges Bank Pricing*
1.20%
1.00%
Chart 4: ...until today has strengthened
NOK
-32
1.00%
-46
0.80%
-54
-54
-52
0.60%
0.40%
0.40%
0.20%
0.20%
Jul15
*Approx. from stripped FRAs /
Oct15
Jan16
Apr16
Jul16
indicate Norges Bank's planned rate decisions in 2015
13/04/2015 12:28
Source:, Danske Bank Markets
-27
-44
0.80%
0.60%
0.00%
Apr15
Norges Bank Pricing*
1.20%
0.00%
Apr15
Jul15
*Approx. from stripped FRAs /
Oct15
-50
Jan16
-51
Apr16
-49
Jul16
indicate Norges Bank's planned rate decisions in 2015
15/04/2015 11:24
Source:, Danske Bank Markets
Important disclosures and certifications are contained from page 5 of this report.
Analyst
Kristoffer Lomholt
+45 45 12 85 29
[email protected]
www.danskeresearch.com
FX Strategy
EUR/NOK may undershoot short term...
In the short term, markets are looking for stories for selling EUR – in particular in an
environment where US data has surprised on the downside and alternative currencies to
buy are heavily sought after. In a currency war environment led by the Swedish Riksbank,
the Norwegian currency has been a good alternative. In addition, Swedish inflation data
over the past couple of days has been marginally on the weak side, which has sent
NOK/SEK higher above 1.10 for the first time since February, when the Riksbank
surprised markets by introducing a negative rate repo-rate and QE.
Technically, we are in uncharted territory for the EUR/NOK. The cross is back at levels
seen before the December sell-off (below the 200-day moving average), which leaves the
question of where the cross is heading next. According to Danske Technical Update, the
support level of 8.4000 should be the first level of resistance. Should this level be
breached, 8.3020 is the next technical barrier.
Chart 5: NOK/SEK has moved sharply
higher
Source: Macrobond Financial, Danske Bank
Markets
Norges Bank figures for foreign exchange transactions reveal that over the past few
weeks foreign banks (proxy for speculative flows) have interchangeably net-bought and
net-sold the Norwegian currency in tandem with oil price movements. Looking at the
cumulative series, aggregate speculative NOK positioning does not seem stretched. (see
Chart 7). Hence, we do not see speculative positioning as a barrier for further downside in
the cross as history suggests room for more bearish NOK bets to be added,
Chart 6: Changes in speculative
positioning reflect oil prices
Chart 7: Positioning does not pose a
barrier for more EUR/NOK downside
Source: Norges Bank, Danske Bank Markets
Source: Norges Bank, Danske Bank Markets
...but still the move seems overdone to us
However, according to our short-term financial regression models, the move lower in
EUR/NOK has been sharper than the model estimate suggests based on the development
in fundamentals. Historically, our model for EUR/NOK has been accurate and, although
current spot is still not trading statistically significantly away from the model estimate,
the model still suggests that EUR/NOK spot should move higher (see Chart 8).
Chart 8: Short-term model indicates
that EUR/NOK is oversold
Chart 9: Cumulative contributions*
cannot explain fall in EUR/NOK
1.0%
0.0%
-1.0%
-2.0%
W-13
2Y swap spread
Source: Norges Bank, Danske Bank Markets
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15 April 2015
W-14
10Y swap spread
W-15
Vix
Oil
W-16
European sovereign spread
* Change in fair value estimate decomposed.
Source: Norges Bank, Danske Bank Markets
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FX Strategy
An important driver for EUR/NOK over the past year has been oil price development.
The reason for this is the oil price collapse, which has led markets to speculate whether
the heavily oil-dependent Norwegian economy – where one in nine jobs is oil related –
can withstand the structural change and new market order. This is also reflected in our
model estimates for the marginal effect of the oil price change on the spot level. During
the oil price decline, the marginal effect of an oil price change has grown steadily
stronger as the oil price has moved closer to the marginal cost levels of Norwegian
producers. However, since March, this effect has again diminished as the oil price has
stabilised.
Importantly, the oil price remains an important explanatory power for the EUR/NOK spot
development, which leads to a discussion of the oil price in trying to forecast the future of
EUR/NOK. Although in Q2 we expect the price of Brent crude to average USD62/bl, up
from the current USD59/bl, we believe the market is likely to remain very volatile in the
near term, owing to uncertainty regarding spare inventory capacity (in particular in the
US), the prospect of a near-term Iran nuclear deal and a volatile USD. As explained
above, oil price volatility has historically been a negative for the NOK and, consequently,
we see the expected oil price development for the coming month as a negative for the oil
price.
In addition, although we are in technically uncharted territory in level terms, traditional
technical indicators such as the 14D-RSI have moved very close to technically oversold
territory. Apart from this summer when we saw a strong fundamentals-driven
strengthening of the NOK, EUR/NOK has historically rebounded sharply when reaching
the ‘30th level’ which is where we currently trade.
Chart 10: Oil price effect diminished
but still economically significant*
* Our beta on oil in our short-term financial model
Source: Norges Bank, Danske Bank Markets
Chart 11: Historically EUR/NOK has
rebounded sharply when touching 30
90
14D-RSI
80
Low
High
70
60
50
40
30
20
Chart 13: Markets price in an
additional 25bp cut in late 2015
Norges Bank Pricing*
-27
-44
0.80%
-50
-51
-49
0.60%
0.40%
0.20%
0.00%
Apr15
Jul15
*Approx. from stripped FRAs /
Oct15
Jan16
Apr16
Jul16
indicate Norges Bank's planned rate decisions in 2015
15/04/2015 11:24
Source: Norges Bank, Danske Bank Markets
Source: Bloomberg, Danske Bank Markets
Finally, as markets have heavily repriced Norges Bank monetary policy over recent
days (not least today), this leaves potential for further speculation about rate cuts up to the
monetary policy meeting on 7 May. At the latest monetary policy meeting on 19 March,
Norges Bank presented a new rate path, which included a 25bp rate cut in Q2* and a 20%
probability of another rate cut in late 2015/early 2016. Recent data releases have been
very much in line with Norges Bank’s revised projections (e.g. unemployment, inflation)
and as Norges Bank will release a new Monetary Policy Report only at the June meeting,
we think Governor Øystein Olsen will wait until June before cutting the sight deposit rate
by 25bp. However, we expect markets – as in March – to price in additional easing in the
weeks ahead of the May meeting, which would weigh on the NOK and send EUR/NOK
higher. Note that a more aggressive pricing of Norges Bank easing could be (wrongly)
exaggerated if we are right in our expectation that the currency war leading Riksbank will
introduce further easing in Q2.
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* Norges Bank meets twice in Q2 15,
namely on 7 May (no release of
Monetary Policy Report) and on 18
June (MPR 2-15 is released)
www.danskeresearch.com
Feb-15
Nov-14
Feb-14
Aug-14
May-14
Aug-13
Nov-13
Feb-13
Nov-12
May-13
Feb-12
Aug-12
May-12
Aug-11
Nov-11
Feb-11
Nov-10
May-11
Feb-10
Aug-10
Source: Bloomberg, Danske Bank Markets
1.20%
1.00%
May-10
1.25%
0
Aug-09
1.40%
10
Nov-09
Chart 12: Norges Bank’s new rate path
has a single 25bp rate cut, in Q2 15
FX Strategy
Medium to long term we remain bullish on NOK
While we see risked skewed towards a higher EUR/NOK in the coming month, we
maintain our bullish view on the fundamentally undervalued Norwegian currency in the
medium to long term.
Chart 14: EUR/NOK ‘fair value
estimate’ to fall to 8.20 by end-2015
on oil price recovery alone
Chart 15: PPP model estimate
suggests that EUR/NOK remains
overvalued
Source: Bloomberg, Danske Bank Markets
Source: Bloomberg, Danske Bank Markets
Medium term, the gradual oil price recovery, the end of Norges Bank easing and the ECB
QE playing out will be supportive factors for the NOK vis-à-vis the EUR. We expect the
Brent crude price to rise throughout the year towards USD76/bl in Q4 and believe that the
Norwegian-eurozone policy rate spread will remain at around 1%. We target EUR/NOK
at 8.25 in 6M and 8.15 in 1M.
Chart 16: We expect EUR/NOK to move higher short term, then lower
9.50
EUR/NOK
9.25
9.00
8.75
8.50
8.25
8.00
7.75
7.50
Apr-14
Jul-14
75% conf. int.
EUR/NOK
Nov-14
50% conf.int.
Feb-15
May-15
Forward
k
Aug-15
Danske fcst
Dec-15
Mar-16
Chart 17: The eurozone is the most
important export destination for
Norway
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
8.65 (83%)
8.50 (60%)
8.25 (39%)
8.15 (36%)
Fwd. / Consensus
8.42 / 8.53
8.45 / 8.68
8.47 / 8.58
8.52 / 8.39
50% confidence int.
8.23 / 8.56
8.16 / 8.67
8.07 / 8.77
7.94 / 8.91
75% confidence int.
8.13 / 8.70
7.99 / 8.91
7.84 / 9.10
7.63 / 9.37
Source: Bloomberg, Danske Bank Markets
The main risk factors for our medium- and long-term bullish NOK forecast are that the
lagged effect on the economy of the fall in oil investments turns out to be more severe
than expected (i.e. labour market, private consumption and the housing market are hit
harder) and that eurozone growth suddenly stagnates against our expectations (this would
hurt the export sector). This could trigger more rate cuts from Norges Bank than we
currently expect. However, recent data has diminished this risk factor.
Source: Macrobond Financial, Danske Bank
Markets
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FX Strategy
Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The author of this research report is Kristoffer Lomholt, Analyst.
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