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Market Analysis

Fundamental Analysis: NOK Recovering from Weaker Inflation

February 12, 2019
BY Michael Stark

The Norwegian krone appears to have stabilised so far this week against most major currencies. Last week, NOK had been hit by weaker inflation data, posting ongoing losses especially against the dollar. A bounce today for the krone comes mainly after gains for Brent in early trading.

At the time of writing, the krone remains close to five-week lows at kr 8.70 to the dollar. EUR-NOK’s correction has been slightly greater though, moving back below kr 9.80. A bounce has also been observed against the yen, with NOK-JPY currently testing 12.70 again.

Inflation at the center but Brent, rates and sentiment watched

While sentiment has been an issue, arguably the most important driver of NOK’s recent losses is the series of weaker data releases over the past couple of weeks. Quarterly GDP growth rate on the 8th of this month missed expectations slightly. Yesterday’s Norwegian data also came in negative. The consumer price index, core inflation and producer price index all posted slight declines from the previous figures and fell below the consensus.

Economic releases are really only half the story for NOK’s fundamentals. The krone’s correlation with Brent crude has moved out of focus temporarily, but a comparison of the two’s movements shows that this is still a crucial factor for sentiment on NOK. Fairly strong gains for Brent in the early hours of today have given significant support to the currency of oil-rich Norway. The benchmark has moved above $62 again today, having bounced from yesterday’s low of $60.90.

Some of the data last month was positive. The good release that drew most attention was Norway’s unemployment rate on 24 January. This showed a decline of 0.2% from the previous figure. Another important point in NOK’s favor against some currencies is the relatively high key policy rate of 0.75%. Among central banks of the OECD/G20, the Norges Bank is moving comparatively well in raising rates.

Sentiment and oil in view for krone traders

The only significant data release from Norway for the remainder of the week is January’s trade balance. This figure, due on Friday at 07.00 GMT, is unlikely to have much of an effect on NOK in itself. Traders are more likely to watch Brent crude and especially whether the benchmark holds above $62 for a significant period.

An area of possible concern is the news that environmentalists might challenge the Norwegian government’s record number of oil production licenses granted, 83 in the past year. The centrality of North Sea oil in the Norwegian economy means that the krone can be very susceptible to disruptions or possible disruptions in extraction.

NOK’s big losses spent, but oil the decider

The Northern Lights might start to shine on the krone again this week after recent gloom: a bounce in the near term at least is the most favorable scenario for NOK this week. That said, Brent and its volatility has the potential to alter this picture significantly.

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