Norges Bank Preview: 25bp cut, dovish bias and limited EUR/NOK upside – Danske Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 15, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Danske Bank, suggests that at its meeting on 17 March, they expect Norges Bank (NB) to cut the sight deposit rate by 25bp to 0.50% for the following reasons.

    Key Quotes

    • “At the previous meeting in December, NB indicated a 60-40% probability of a March cut and...

    • ...foreign rates are lower, the wage outlook is weaker, credit spreads are marginally higher and the output gap is somewhat larger than NB projected.

    • Spot oil prices are roughly in line with expectations, although the forward curve is somewhat below the projection from December.

    • On the other hand, the NOK has been slightly weaker than projected and February core inflation was 0.3pp higher than NB’s forecast. However, we do not believe the effect on the rate path will be enough to counter the factors above.

    If we are right in our call, we also expect NB to indicate a dovish stance by lowering the rate path, signalling an 80% probability of a rate cut before Q4 16. The current rate path from December has a 44% implied probability of another 25bp rate cut before Q4 16.

    Main risk factor. The largest risk factor is that NB fully incorporates the wage expectations from the regional survey. If so, the rate path will include a 100% probability of another rate cut, with the likelihood of an even more aggressive rate path like the one presented in December 2015.

    Market pricing. We estimate that markets are pricing in roughly 75% probability of a 25bp March rate cut, an accumulated 30bp rate cut for the June meeting and an accumulated 46bp worth of cuts on a 12M horizon (the point where the most easing is priced in).

    FX. We expect EUR/NOK to rise on the announcement. However, market pricing limits the upside potential. We still look for an eventually lower EUR/NOK in 2016, although we see the biggest potential in H2.

    Fixed income. A temporary weakening of the NOK in the wake of the monetary policy meeting, may be an opportunity for foreign accounts to add unhedged positions in long-dated Norwegian government bonds.”
    For more information, read our latest forex news.

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