Post-Hike Confusion: NOK's Price Action and Outlook Amidst External Factors

NOK: Confusing post-hike price action

Norges Bank opted for a 50bp hike yesterday, bringing the policy rate to 3.75%. If that was not enough of a hawkish surprise, the Bank raised its forecasted peak rate to 4.25% (in the fourth quarter of this year). As discussed in this note, supporting the weak krone remains the primary aim, although the Bank’s rate-setting model seemed to suggest that higher wages and inflation played a much bigger role in the rate path’s upward revision.

The post-meeting EUR/NOK price action is a reminder of how domestic factors and the role of Norges Bank in the currency market remain secondary to external factors for such a risk-sensitive currency like NOK: the pair is back above pre-meeting levels this morning (11.75) amid a large risk-off repricing. Next week’s FX purchase announcement is also a key risk event for NOK.

We are of the view that the krone is now in a stronger position thanks to the aggressively hawkish stance of Norges Bank. We expect, however, to see NOK’s gains against the euro materialise later in the year as sentiment stabilises. For now, we see NOK outperform its closest peer SEK on the back of policy differential and smaller domestic tail risks.