Oil double dip hits NOK

After what seemed like a very promising H1 for NOK, another slump in oil prices has dragged NOK lower with it, erasing virtually all the gains made this year. Diving more than 20% since May and still trending lower, oil prices are in another technical bear market. 

At USD50/b, Brent crude is fast approaching the low of /b reached early in the year when the selloff in the energy complex was at its nadir. Further exacerbating the move lower in NOK was an unexpected tilt towards further possible easing by the Norges Bank after rate cuts in June. 

As a result, NOK is back near the lows reached in Q1 this year. No matter what the domestic fundamentals are, NOK is still widely seen as a proxy for oil prices and where oil goes, NOK follows. This is because the oil and gas industry makes up 21% of GDP, contributes 30% to government revenues, and represents almost 50% oftotal exports. 

As a result of last year's oil decline, oil and gas investments have fallen ~15% this year while the unemployment rate has accelerated to 4.2% (from 3.2% a year ago). Other macro indicators still point to an economy that is still resilient relative to the huge decline in oil prices last year. 

"Indeed, core inflation spiked up to a six-year high of 3.2% in June after hovering near the Norges Bank's target of 2.5% for the past 18 months. The latest reading may be a one-off and there are still a few more CPI releases before the next Norges Bank meeting. Over the short term though, NOK looks vulnerable as oil prices continue to trend lower", says RBC capital markets.