BNY’s Geoff Yu argues that while Norwegian Krone (NOK) should find demand from improved Oil and gas terms of trade and a relatively hawkish Norges Bank, elevated holdings and modest FX purchases limit upside. He warns that rising energy receipts reduce non-oil budget purchase needs, keeping Norges Bank’s support for NOK tepid despite the recent increase in daily buying.

Norges Bank flows constrain NOK

"In G10, NOK will again find demand as markets price in improved terms of trade from oil and natural gas sales. Additional support may come from Norges Bank being seen as the most hawkish central bank in Western Europe. These factors were already true in March, and holdings remain elevated by iFlow standards."

"EUR/NOK is currently only 2.5% away from the 12-month low in May, so risk-reward isn’t compelling. On a holdings basis alone, there is better value in adding to energy equities, especially Norwegian ones. Energy comprises 29% of the MSCI Norway, far above the 4.3% share for the MSCI Europe Index."

"We voiced concern in Q1 that Norges Bank’s own FX transactions would not have any amplification effect and could become a headwind. Oil receipts remain high, which means NOK purchase requirements for the non-oil budget will be relatively low. Norges Bank’s buying of NOK through Q2 was the lightest since purchases restarted 12 months ago."

"The recent drop pushed the July requirement up to NOK 400mn per day, but there is now downside risk to total transactions as energy receipts grow. Coupled with more subdued domestic inflation and wage growth, Norges Bank support for NOK in all forms will stay tepid."

"Don’t chase broad EM FX shorts. Use energy and commodity strength to rotate into select high-carry commodity exporters, especially BRL, CLP and ZAR, while staying cautious on NOK."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)