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The outlook for NOK is cautiously optimistic in 2H on several factors. An outsized fiscal response necessitated sales from the sovereign wealth fund thus causing the NB to buy NOK/sell FX in record amounts. Combined with the fact that Norway benefits also from a strong external and fiscal position, cheap valuations as well as a central bank that has thus far resisted both negative rates and QE puts NOK in a favorable light, especially compared with other G10 high beta FX which are of lower quality (GBP, CAD, NZD for instance). We are thus constructive on NOK on the crosses vs. these currencies. This is not to say that NOK will be immune from risk-off episodes—the price action over the past two weeks confirms that NOK remains a high beta play—but a relative value approach should partly provide a cushion against such moves. The Norges Bank was unique this week in signaling possible rate hikes which was hawkish, but this wasn’t slated till 2022 so is not expected to materially impact the currency near-term.
The long NOK view has been expressed outright vs. USD as well as on a RV basis vs. CAD and GBP. We were stopped out of the short USD/NOK position at a loss. Given the gyrations in the macro landscape, we keep USD exposure light and future positions vs USD will likely be considered via options. The relative value view is maintained. We stay long NOK vs. CAD and GBP; longs vs. NZD is also an option that could be considered in this vein. To the extent that risk remains well- supported and global reopenings keep the attention of markets, CAD should remain an attractive funding currency as a distinctly-lower beta currency than NOK. That the oil sector has cut more production through 1H’20 than any other major global producer underscores that CAD should not outperform other cyclical FX, and the new BoC Governor Tiff Macklem adds a potentially CAD-negative dovish overlay as he assumes his new role.
Stay long NOK on RV basis: long NOK vs. 50:50 basket of GBP and CAD; stopped out of long NOK vs. USD at a loss.
Trade tips:
Stay long NOK vs. 50:50 basket of CAD and GBP, at an average spot rate of 9.524, and a separate stop losses at 12.310 for GBPNOK and 7.220 for CADNOK. Marked at +0.33%.
Long NOK vs. USD at 9.289 was stopped out at a loss of -3.35%. Courtesy: JPM
