Norges Bank rate decision
The NOK has benefited from expectations that the Norges Bank will become the second G10 central bank to hike its policy rate on Wednesday. So far, however, FX investors have focused on which central banks will begin tightening policy this year but not how quickly the tightening is likely to take place. As central banks start to implement their exit strategies, this will become a more important issue. Indeed the accompanying communication, including the MPR, will be crucial for the NOK in terms of providing more detail on the likely pace of future tightening and the role of the exchange rate in the policy deliberation. The bottom line is the meeting presents some short-term downside risk for the NOK as some expect the Norges Bank to signal only gradual tightening ahead, which would disappoint those expecting an aggressive pace. Extreme bullish positioning adds to this risk. However, the NOK remains undervalued relative to other asset markets, so any weakness is likely to be temporary and any pullback would be viewed as an opportunity to buy.
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