DNB markets dealingroom in oslo

(11.04.2011) The oil price has climbed markedly over the last few days. In light of this, the Norwegian krone remains surprisingly stable versus the euro. We believe this also will be the case going forward and expect EURNOK to trade in a range between 7.70 and 8.00

By Camilla Viland, Analyst at DNB Markets

The euro has strengthened further versus the dollar and EURUSD is currently trading at the highest levels in 15 months. The development is mainly due to expectations of increasing interest rate differences between the US and EMU. The ECB hiked its key policy rate by 25 basis points last Thursday and the market believes they will continue to raise rates. The Federal Reserve has on the other hand not given any signals that a normalization of monetary policy is nearing.

The weak dollar may be one reason why the oil price keeps climbing. One barrel of brent oil has been trading at its highest around 127 dollar. The situation in Libya continues to dominate the oil market. It seems like oil fields in Libya are target for military strikes which mean that Libyan oil production could be out of the market for a long time, even if the civil war in the country should end. This has driven the oil price up. On the other hand the oil price has fallen somewhat back so far today on Libya peace talks.

Despite of a rising oil price, international turmoil and large movement in international currency crosses, EURNOK has remained very stable. So far this year the currency cross has been trading in an interval between from 7.70 to 7.95. We expect this trend to continue. Fundamental factors that normally help to explain EURNOK developments point in different directions. We expect Norwegian interest rates to rise relative to European going forward. This indicates a stronger NOK.

On the other hand we expect to oil price to decline from current high levels, which point towards a weaker NOK. It is however worth mentioning that the latest oil price increases has had surprisingly small effects on the Norwegian krone. Thus, similarly, a reversion of the oil price may not influence the NOK too much.

A last factor that often explains movements in NOK is risk appetite. It is hard to predict shocks in the market. And considering that different volatility measures currently seems to be around their average levels, we expect this factor to be NOK neutral.

There are of course other factors that may also affect the Norwegian krone, for example Norges Bank's foreign exchange purchases. Given a higher oil price and the estimates given in the 2011 budget, the central bank may again start to buy foreign exchange. This may again weaken the NOK. Increased NOK sale as a result of dividend and coupon payments and government debt maturities may also affect the NOK negatively.

In total there are several factors that point in different directions. Our main scenario is, as a result, that we expect EURNOK to be relatively stable going forward, and see the currency cross trading in an interval between 7.70 and 8.00. As we are generally euro negative our forecasts lie in the lower end of this interval.

In a meeting between leaders in the EU, it was made clear that Portugal had to commit to structural reforms to bring down its budget deficits and debt in return for an estimated EUR 80 billion in emergency loans. Delegates from the EU, ECB and the IMF will now travel to Lisbon to try to negotiate an agreement. They aim to have an agreement ready by May 16th, three weeks ahead of the Portuguese election. The EU leaders also made an effort to curb speculations that Spain would be the next country in need of help. The market seems to agree that Spain will be able to manage without a rescue. The yield on Spanish debt has actually fallen relative to similar German debt after it was revealed that Portugal would apply for help.

Today IMF releases their report World Economic Outlook. Besides this, Norwegian inflation figures for March may gain some attention. In February core prices rose 0.8 per cent y/y, somewhat lower than expected. We expect the price growth in March to be 0.9 % y/y. The inflation figures are among the most important indicators for the central bank. Deviations from consensus expectations may, thus, result in market reactions. However markets are unlikely to change their opinion on what the central bank will do on their next interest rate meeting in March based upon these figures along. We expect Norges Bank to hike rates by 25 basis points in May.