Norges bank’s probable 25 bps rate cut to cushion NOK – unemployment and oil slumps major apprehension

The week's key releases will be the two unemployment figures. After a strong surge in unemployment in the labour force survey but a more moderate rise in the Norwegian Labour and Welfare Administration's figures for gross unemployment over the past year, the latter also climbed by 2,500 in July. However, we still estimate the LFS unemployment to level off at 4.3% in June (May-July). Either way, the figures should confirm that the labour market is deteriorating, albeit somewhat less dramatically than in the previous months.

In Norway, the unemployment figures are likely to confirm a weakening trend in the labour market but that is already expected and our forecast for the unemployment rate is in line with consensus at 4.3% in July. The NOK's sensitivity to oil price changes is very high and data on US oil inventories could be directional for EUR/NOK this afternoon as it was last week.

Fundamentally, the projections of Norges Bank to slash rates by 25bps in next month as a final insurance cut against the collapse in the oil price. The market is pricing in 20bp for September and around 45bp before June 2016 in terms of rate cuts. However, the market may up its expectations ahead of the September meeting pricing in a full 25bp rate cut for the meeting and 50bp in total over the coming 12 months. This coupled with the collapse in the oil price may put further pressure on the NOK short term, both against the EUR and USD.