Forex Investment and Currency Trading

Rather improbably, global risk aversion has hurt the NOK due to its new found ‘status’ as a high yielder. A binary focus on yield ignores the currency’s obvious safe haven characteristics and won’t last.

Trading the NOK/oil correlation has also been popular. Again, the market’s view has been one dimensional as even a $30pb oil price decline would still leave NOK fundamentals rock solid.

Despite a poor start to 2008, the outlook for the NOK is positive. The last Monetary Policy Report is consistent with the policy rate rising further into summer. The Executive Board anticipates rates in the interval 5 – 6% in the period to the publication of the next Report on 25 June, unless the Norwegian economy is exposed to major shocks. Much stronger PPI and expectations that wage growth will remain strong (reinforced by rising CPI) could well see rates raised as early as the April 23 policy meeting.

Momentum behind consumer demand, fuelled by wage and employment growth, will ensure that growth remains at or above trend. Even it rates aren’t raised again, with the ECB, BoE and Fed all expected to cut interest rates over the next six months, spreads will still move in a NOK friendly direction. Rates are already higher than in the US and Euroland and Norway is closing in on the “high yielders”.

With the UK having cut in February and probably about to cut again, Norwegian rates will shortly rise above UK rates for the first time since August 2003. Globally, demand for yield is a function of expected volatility and general risk appetite. Both are likely to play negatively for yield attraction and this will in part limit the NOK’s ability to benefit from becoming a “high yielder”. In previous cycles the NOK’s strong current account position has provided some insulation from risk aversion headwinds.

If the NOK strengthens too quickly, export growth will weaken and inflationary pressures will ease. Interest rates could then be cut earlier than expected. The last monetary policy report suggested some willingness to put the brakes on NOK gains through interest rate policy. But with inflationary worries so prevalent, Norges Bank will ultimately welcome the NOK’s dampening impact on inflation.