Strong scandies

(01.03.2011) The oil price has declined somewhat since yesterday morning, but the NOK remains strong. On a trade weighted basis the NOK is at its strongest levels since May 2010. The SEK is also strong. Yesterday it was revealed that the Riksbank governor saw the possibility of interest rate hikes at every monetary policy meeting this year as rising. This further strengthened the Swedish currency.

By Camilla Viland, Analyst at DNB Markets

illustration - moneyTurmoil in Libya has reduced oil export from Africa. Saudi Arabia has however increased output to cover this. Concerns regarding the MidEast supply do however still dominate and the oil price is currently trading around USD 113 a barrel. The high oil price is positive for the NOK which is trading at strong levels. At trade weighted basis the NOK is at its strongest since May last year. The NOK is currently stronger than anticipated by the Norwegian central bank.

The central bank is also concerned about credit growth. Figures released yesterday show that household's credit growth remained at 6.5 per cent in January. Total credit growth was 6.1 per cent. Today house price figures may give an indication of future credit growth. Over the last six month house prices have grown by about 1 per cent a month on a seasonally adjusted basis. We expect the growth to abate going forward and foresee a growth rate of 0.5 per cent in February. As long as credit growth remain moderate and the NOK strong, Norges Bank is in no hurry to raise rates. We believe the next interest rate hike will take place in June.

Strong economic development and interest rate hikes have generally contributed to a strong Swedish krone lately. The interest rate has gradually been hiked since July, from 0.25 to 1.50 per cent. The level is however still very low and the central bank has signalled further hikes going forward. In the minutes from the central bank's last meeting, the governor Ingves said there is an increased possibility that the repo rate will be raised at all of the monetary policy meetings this year. This contributed to a stronger Swedish krona yesterday. The currency is trading at its strongest levels versus the dollar since August 2008.

The dollar fell yesterday. One factor behind the decline was expectations that Ben Bernanke at today's testimony for the senate will retain its stance that the economy is improving, but not fast enough to lead to a significant improvement in labour market conditions. Thus, interest rates will remain at current levels for the foreseeable future.

In Europe interest rate expectations are increasing and today's inflation figures may further raise expectations. The ECB aims to keep inflation close to, but below 2 per cent. In January inflation reached 2.2 per cent and consensus expect the February outcome to be even higher (2.4%) If the actual outcome exceeds expectations, rates may increase and the euro may strengthen.

Another figure that will be given a lot of attention today is the US ISM index for the manufacturing sector. Last month the index rose to 60.8, the highest level in more than six years. This time, both we and consensus expect an outcome at 61. The ISM index is an important indicator for the economic condition in the US and the outcome of todays figure may, thus, pose market reactions.