FX Daily: Norges Bank Just the First European Central Bank To Retaliate to ECB’s June Action

20th June 2014 By: Eimear Daly

  • BoE MPC member Ian McCafferty said the economy has grown faster than expected so far this year and a further robust expansion is likely, making a rate rise likely although the exact timing remains uncertain. (The Guardian)
  • There has been a four-fold increase in the Fed’s trading in the Fed’s trading in with money market funds in the repo market at the expense of Wall Street Banks. Fed’s increased presence in repo is a signal that it is testing new ways to control short-term interest rates once it starts tightening monetary policy. (The FT)
  • The IMF said Thursday that the Eurozone recovery is taking hold but isn’t sufficiently strong enough to advance without continued and further support from the ECB. The IMF urged the ECB to add to its present monetary policy measures with more non-standard tools in order to provide more demand support to help encourage growth and ignite inflation. (MNI)
  • China’s Guangzhou government has quietly loosened price caps in suburban districts, offering buyers more room to apply for loans and reduce costs. (New Express Daily)
  • There are mounting debt problems in China’s second biggest city of Jiangsu with a slowing real estate market, the drying up of private lending and industrial overcapacity leading to rising bad debts among companies. (China Business News)
  • The decline in iron ore prices is putting pressure on junior miners with the operator of the Caim Hill mine in South Australia’s outback being placed in to voluntary administration. If iron ore prices remain around $90/tonne, Australia’s producers will get a revenue hit of around $30 billion. (The Australian)
  • PIMCO’s global head of corporate bond portfolio management Mark Kiesel confirmed the bond giant remains “constructive on Spain and Italy” debt markets. (MNI)
  • New Zealand’s May ANZ Job Advertisements fell -5.25 on the month, however it following four consecutive months of gains.
  • New Zealand’s ANZ Consumer Confidence rose 3.4% on the month to 131.9.

The G10 currency trader were sent into a tail spin yesterday when the Norwegian krone fell 2% against the euro, momentarily moving above the NOK8.36 level. Traders grappled to digest an aggressively dovish statement from the Norges Bank after strong economic growth and hints from the central bank itself had them pricing in rate hikes this year. The Norges bank revised down its path of future policy rates and stated that “there are prospects that the key policy rate will remain at about today’s level to the end of 2015”. The complete change of heart was apparently based on lower than projected growth in the period ahead. The central bank even stated that a reduction in the key policy rate may be warranted if the economy weakening further. Governor Olsen later assigned a 25% probability on this materialising this year. We are slightly dubious as to Governor Olsen’s assertion that a slower growth outlook dramatically changed the policy outlook in the space of 3 months. The projected path rate for growth was downgraded slightly in 2014 and 2015 but offset by higher projected growth from 2016 on. A graph in the central bank’s accompanying material shows the real reasons behind the shift in stance – lower projected petroleum investments and lower interest rates abroad. We expect the later had more to do with the change in stance than the former and get the distinct whiff of competitive currency devaluation here. The Norges bank explicitly downgraded the rate outlook for both the Eurozone and Sweden- which just happen to be its two key trading partners and their policy statement asserted that policy rates abroad will remain lower for longer in Europe.

We were not particularly surprised by the turnaround from the Norges Bank yesterday nor do we see it as an isolated incident in Europe. We expect many CEE and Nordic central banks to push back against the ECB’s June policy easing by becoming less hawkish or more dovish. In their defence, this isn’t just about competitive devaluation. Central banks will be keen to head off currency appreciation to prevent imported deflation exaggerating already severe disinflationary risks in their economies. These risks are greatest in Poland, Czech Republic and Sweden and as such we would look to play retaliation by the Nordic and CEE central banks to the ECB’s recent easing by shorting these currencies against the euro. A bubbling housing market and more subdued disinflation pressures means we question the Norges bank’s commitment to pushing back rate hikes, though there is likely to be further climbs higher in EURNOK in the short-term.

Sterling-dollar broke clear above $1.70 in trade yesterday and this time managed to hold its ground. The bears may maintain that sterling positions are stretched but we argue that relative growth differentials as well as monetary policy divergence means sterling-dollar will continue to appreciate above $1.70 with a medium-term target of $1.73. The Fed’s press conference yesterday certainly demonstrates that the dollar is likely to remain weak if Fed has anything to do with it. However volatility in this cross is bleeding means we face a slow crawl higher. The 3% jump in gold prices yesterday backs up our call that there is inflationary risk in the US means there are risks to a sterling-dollar long positions and realistically it’s too late in the game to make any real profit on this trade. We prefer to play a sterling long position against an Aussie short. There is greater monetary policy divergence in this cross after the RBA’s recent dovish statement. Australia still needs to reinvent itself after the mining sector investment boom and lower iron ore prices are starting to force junior miners out of the industry. The pain is just beginning for Australia. The Aussie has been temporarily supported by a carry environment but the beginning of a G10 tightening cycle will reverse these flows. We recommend buying GBPAUD on dips towards A$1.80 with a target of A$1.90 on a six month view.