Norwegian krone falls after inflation update, but SEB sees buying opportunity

The krone fell to its weakest level against the euro since the US election on Friday after a disappointing inflation update, but analysts at SEB think the move capped off what had already been an “irrational” couple of weeks for the currency, which should soon resume its recent climb.

At publication time the krone was 0.4 per cent weaker for the day, at 9.1375 per euro, and is on track for its worst week since December 2015.

The 2.1 per cent weekly depreciation – following a 1.1 per cent decline last week – was encouraged by falling oil prices earlier this week, but nordic bank SEB says the extent of the recent moves was unwarranted given the underlying strength of the economy.

Says senior FX strategist Richard Falkenhäll:

The move makes no sense, given that the fundamental economic outlook is essentially the same as it was two weeks ago.

Pointing to higher oil investment plans and improved economic confidence, credit growth and retail sales, Mr Falkenhäll said “it would be quite a challenge to build a case for a weaker krone on the back of this information”.

This morning’s data from Statistics Norway showed core inflation in Norway continuing to drop, raising the prospect of a dovish statement from the central bank at next week’s policy meeting, but analysts are confident that rising credit and house prices will prevent any major change in policy.

Instead, Mr Falkenhäll argues, the recent pullback was most likely a product of the krone’s rapid appreciation beforehand, meaning bulls could benefit if they stay the course:

Late last year virtually all analysts expected the euro to trade down to somewhere between NKr8.80 and NKr8.60 by the end of 2017. When hitting NKr8.80 already on February 22 most market players probably realised that the potential for further appreciation [in the krone] was limited and decided to scale down exposure.

…As a result the current level seems very attractive to re-enter the ‘favourite trade of the year’. Perhaps it could be wise to wait for momentum to fade before getting back into the market, but no doubt, these are good levels.