NOK defies oil price plunge

Low risk appetite pulled the price of long government bonds, the USD and the Swiss Franc up yesterda

(24.06.2011) Low risk appetite pulled the price of long government bonds, the USD and the Swiss Franc up yesterday, while stock markets fell. The Troika's approval of the Greek austerity measures served to brighten investors' mood. The oil price plunged after IEA decided to release 60 million barrels from strategic oil stocks yesterday. In spite of this the NOK appreciation continues in the wake of a more hawkish tone from Norges Bank.

By Kjersti Haugland, Senior Economist at DNB Markets

Markets were retained yesterday, in the wake of Fed's downward adjustment of the growth outlook on Wednesday. The fact that initial claims were higher than expected, and that the US budget negotiations between the White House and the Republicans broke down was not helpful for investors' mood either. Hence they continued to seek safe havens. The Swiss Franc reached a new record-low against the euro (1.1844). The dollar strengthening continued, and EURUSD came down to 1.41. US 10-year government yields were down, approaching 2.90%.

The market sentiment has improved during the night, driven by the news that the EU/IMF/ECB-troika has approved the Greek government's austerity plan. EURUSD has increased slightly again, and is at the moment traded at 1.42. Long government bond yields have also gained slightly. However: the vote in the parliament on 28 June remains. It is far from certain that Papandreo will be able to pass the tough plan that involves spending cuts, higher taxes and sale of national assets. The consequences of a negative turn-out will be severe. The Eurogroup leader Jean-Claude Juncker repeated yesterday that all conditions must be met in order for the troika to provide Greece with the funding it needs.

The International Energy Agency (IEA) has decided to release 60 million barrels of oil from its strategic stocks. This is the third time in history that the strategic stocks are used. The news led to a plunge in the oil price, which is now around 108 USD per barrel, down from 113 USD yesterday morning. The NOK weakened immediately after the announcement, but the movement was temporary. The NOK is stronger against most currencies, compared to yesterday morning. It is evident that the monetary policy meeting on Wednesday, which featured a more aggressive interest rate path than was expected, dominates NOK movements at the moment.

The fine prints of the Monetary Policy Report reveals – in black and white – that Norges Bank puts more weight on the outlook for the real economy than before. A footnote in the report states that the parameter in Norges Bank's model that captures the trade-off between deviation of inflation from target and deviation in capacity from normal has been changed (the so-called "Lambda-parameter" has been upwardly revised, from 0.1 to 0.5). The change is effective from the start of 2011, when Øystein Olsen replaced the former governor. The central bank practises more flexible inflation targeting than before: In a situation where inflation is below target, it will choose to use longer time to get back on target, to avoid fluctuations in production and employment.

The decline in the Euro area flash PMI in June was larger than expected by the markets. The level of 53.6 still indicates growth, but the index has fallen by nearly five points during the last two months, and is now below the long-term average (before the financial crisis) of 54.6. Some of the decline is due to temporary factors, like supply-side disruptions in the wake of the Japanese disaster. Still: The underlying growth pace is clearly declining. The manufacturing index declined from 54.7 to 52.0, and the sub-index for new orders has come marginally below the level of 50, indicating falling orders. The service sector PMI came down from 56.0 to 54.2. Today's most important European release is the German IFO-index for June, which is expected to decline somewhat.