Just a quick comment: We’ve seen a lot of bullishness lately for the Scandinavian currencies lately.
It makes sense. Countries like Sweden and Norway benefit from rising oil prices, and yet they’re pretty insulated from all the chaos happening in the world.
What’s not to like?
From Morgan Stanley:
For the time being, subdued inflation, moderate growth, and central bank pushback on currency strength will likely temper NOK’s gains. Inflation has yet to materially turn higher in Norway and while domestic demand remains resilient, much of Norway’s Q4 GDP miss came from a softness in exports. Both of these factors are likely to provide the central bank with more reason to push back on currency strength. Moreover, the finance minister has also joined the chorus pushing back against currency strength.
That said, we believe that the fundamentals are in place for NOK to outperform in the coming months. NOK should remain underpinned in a rising oil price environment, especially as the country is a very large exporter of the commodity. Even before tensions arose in MENA, our commodities team had forecast crude to end the year at $110/barrel. Supply distributions in the Middle East only add upside risk to these forecasts. As seen in Exhibit 3, NOK tends to trade closely with oil prices. What’s more, even in the most recent risk-off environment, where we would typically expect NOK to sell off, the currency remained resilient as crude marched higher. So long as oil remains supported or continues to move higher, we believe that NOK will trade favourably; NOK will likely gain in pro-risk environments, but currently has also exhibited that it can remain insulated in risk-off periods as well. Additionally, as deficits in developed markets come to the fore of the market’s attention, NOK’s dual surpluses will likely keep it underpinned in deficit-related bouts of risk aversion (Exhibit 4).
Longer term, should these current higher oil prices prove sustainable, growth and inflation in Norway are likely also show up a strong pick-up and the Norges Bank will have no choice but to resume its tightening cycle, even in light of a strong currency. As this materialises, we believe that NOK will be poised to outperform its peers this year. However, data will be key; the next Norges Bank rate decision on March 16 will be especially important for the central bank to potentially discuss its views on higher commodities prices and their impact on the economy and monetary policy. This meeting also coincides with the first Monetary Policy Report of the year.
In conclusion, we suggest owning both Scandinavian currencies, though we expect SEK to outpace its peer in the near term, before passing on the baton for outperformance to NOK later this year.
Photo: Morgan Stanley