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Funding in NOK seems to be lucrative and is substantiated as 1) limit drawdown in the event Fed policy gets upgraded more aggressively, and 2) benefit from continued drift in NOK as the Norges Bank remains at the back of the line to tighten monetary policy. The upgrade to the Norges Bank’s rate path this week does not necessarily change the relative sequencing of policy moves in NOK’s favor.
In BRL, faster growth should strengthen portfolio inflows and reinforce a much improved current account. Elections will be an issue starting in 2Q’18, but our base case is for a market friendly outcome, one that will allow the passage of pension reform.
Bought BRL/NOK at 2.5360 on November 21. Review at 2.46.Marked at -0.48%
Markets have been quiet the last few days, with most markets closed on Monday and Tuesday. NOK appreciated against EUR and USD Friday and yesterday afternoon. EURNOK is down 0.6% to 9.86 while USDNOK is down 0.8% to 8.30 since Friday morning.
The appreciation of the NOK yesterday is probably related to an increase in oil prices at the same time. Brent crude is up 3% since Friday morning, now trading close to 66.7USD/barrel.
Norway and Sweden are experiencing strong growth but are at different stages of their cycles: Sweden’s expansion has decelerated, whereas Norway is playing catch-up. Meanwhile, Sweden’s housing market is probably a bigger risk than Norway’s. Real house prices have increased faster in Sweden, raising more financial stability risks and potentially a higher risk of a central bank policy mistake (the market has kept in mind the Riksbank’s dangerous tactic of ‘leaning against the wind’). Moreover, NOK rates have delivered decent carry, whereas SEK short rates are still anchored in negative territory.
Finally, NOK/SEK has likely formed a double-bottom just above parity, suggesting that the market is unwilling to go short the cross.
Long a 6m 9.60 EUR put/SEK call. Paid 57.2bp November 21. Revalued at 52bp.
