Stronger NOK

(24.01.2011) Last week was mainly characterized by a broad strengthening of the euro. Figures also confirmed that currency traders have reversed their bets against the euro and are positioning themselves for further strengthening. This week there are several important macro figures on the agenda, with monetary policy meetings in Norges Bank and Fed as the highlights. Furthermore, GDP for the fourth quarter are published for the US and UK.

By Maren Romstad, Analyst at DNB Markets

meglerrom DNB markets ccLast week became a good week for the European currency. Several upbeat macro figures, increasing inflation expectations, possible improvements of the stability fund and more and more expecting early rate hikes from the European central bank were all contributing factors behind the euro strengthening.

Furthermore, figures from Chicago Mercantile Exchange confirmed that currency traders have increased their long positions in euro. Last week’s figures showed that investors bought euros for 8 billion dollars, a record for a week. This meant that the overall net speculative position switched from a bet that the euro would fall against the dollar, to a bet that the currency would strengthen. The euro strengthening continued on Friday, and can probably be attributed to another surprisingly good macro figure.

The Ifo index
, often referred to as Europe’s single most important index, rose more than expected in January and is at record highs. The index is now consistent with a GDP growth of nearly 5 per cent. However, we expect growth to slow going forward, particular as a result of fiscal tightening.

The euro also strengthened further against pound sterling on Friday, due to weaker macro figures than expected. Retail sales fell relatively sharply in December, but this was mainly due to temporary factors such as a heavy snowfall in December. But it’s also important to remember that VAT increases, rising inflation, declining employment and a very weak housing market are unlikely to provide the foundation for a solid rebound in comsumer spending.   

This week there are several highlights on the agenda, with Wednesday's monetary policy meetings in Norway and the United States as some of the main events. In Norway it will be the first monetary policy meeting with a new governor in twelve years, but we don’t expect this to give a major impact on the interest rates decision.

The interest rate path from the monetary policy report in October suggests that interest rates should remain unchanged until the summer. However, the risk of an earlier hike has increased, especially as a result of several uplifting Norwegian macro numbers. Recent development has also increased market expectations. Now it seems that the market is pricing in roughly 10 basis points rate increase at each of the next four meetings after the January meeting. Key figures support the picture of an economy that is heading towards more normal growth, especially consumer spending and house prices have surprised on the upside. Especially the latter, seen together with the risk of financial imbalances, suggests faster rate hikes from Norges Bank. We believe, however, that the central bank will postpone this discussion to the March report. 

Later that same day, it is due for the monetary policy meeting of the American central bank. It is expected very few new signals, but the press release will probably reflect that virtually all macroeconomic figures since their last meeting has surprised on the upside, maybe with the exception of the most important. The labour market development is still weak. This is a very important factor for Fed and will most likely be high on the agenda.

Furthermore, the interest rate committee will probably not give signals about changes in the purchases of government bonds. At its last monetary policy meeting it was agreed that both the pace and size of the planned purchases were conditioned by developments in financial markets and the economy in general, but that the threshold for making changes in the program are very high. A final factor that can attract some attention is that four members will be replaced in the annual rotation. The hawk Hoenig is out for now, but as for Norges Bank we do not expect this to give major changes in the monetary policy.