Thursday, 19 September, 2019
VOLATILITY GUARANTEED AS NORGES DECISION TOO CLOSE TO CALL::
VOLATILITY GUARANTEED AS NORGES DECISION TOO CLOSE TO CALL:: A market split down the middle makes a neutral decision from the Norges Bank close to impossible. While domestic data (inflation, labour market and the much-vaunted Regional Network Survey) remains strong, the executive board have named both Brexit and the trade war as downside risks. Nonetheless, NOK remains weak on a trade weighted and REER basis, giving the board room to tighten policy and control financial stability without importing disinflationary pressure. Additionally, the risks posed by the Sino-US trade spat and a disruptive No Deal Brexit are broadly symmetric, with resolutions and quick fixes for both well within the realms of possibility. This gives the Norges Bank room to commit to their rate path and hike rates 25bps in September. Dovish risk: Norges Bank throw in the towel on tightening cycle by flattening rate path projections aggressively. Terminal rate cut below 1.5% indicating little chance of fresh rate hikes across the forecast period. Results in protracted NOK weakness, sending both EUR/NOK and USD/NOK to fresh multi-year highs Hawkish risk: After a 25bps hike, terminal rate is boosted closer to 2%, signalling the Norges Bank are happy to look through external risks and concentrate on domestic economic strength. NOK aggressively rallies and Norwegian FRAs materially bump higher.
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