Norwegian krone remains undervalued, EUR/NOK likely to fall towards 8.90 by end-2017

After dropping briefly to a new year-to-date low against the euro, the Norwegian krone has finally gained some traction, noted Lloyds Bank in a research report. External conditions have been advantageous for the Norwegian currency. Significantly, oil prices formed a base in June and have subsequently rallied back above USD 50/bbl.

Meanwhile, Norwegian data have been mixed. While the PMI survey data shows strength, inflation continues to be firmly in a declining trend. Domestic conditions exert little pressure on the Norges Bank to either loosen or tighten policy at this stage. The market, in fact, is not expecting any alteration to interest rates until the second half of next year. While the Norges Bank highlighted that the risks to rates are now “balanced”, this move is seen as a less ‘dovish’ stance as indicative of asymmetric risks towards tightening. Furthermore, the NOK continues to be fundamentally undervalued.

“We look for EUR/NOK to decline towards 8.90 by the end of the year”, added Lloyds Bank.

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