Strength of Krone and Prospects Higher Norwegian Rates

Norway is the only major European country to hike rates last year and did so twice in H2 09. The central bank indicated after the Dec rate hike that if the krone appreciates more than expected, it could delay or limit further rate hikes. The krone has rallied about 3.25% on a trade-weighted basis over the past few weeks, during which time the euro has fallen 4.3% against the NOK. With real money interest and higher oil prices exciting the speculative community, the krone is off to a strong start this year, second only to the Australian dollar.

Shortly after the Dec rate hike, the Norges Bank learned that unemployment ticked up in Nov and retail sales were much weaker than expected (-1.2% vs consensus +0.4%). Today Norway reported somewhat higher consumer price inflation. The headline figure rose 0.2%, though the consensus was for a 0.1% increase. The year-over-year rate jumped to 2.0% from 1.5% in Nov, which was also slightly more than expected. The core rate was unchanged at 2.4%.

The Norges Bank next meeting is Feb 3. The economic calendar over the next few weeks is fairly limited. Employment and retail sales at the end of the month may be of interest and credit growth and Jan mfg PMI in early Feb may attract attention. But,the movement of the currency could be the most important factor. Given some signs of that the euro zone economy may have lost some momentum in Q4 and poor weather may dampen Q1 10 growth, look for Norges Bank to stand pat, unless the krone weakens sharply.

We expect the krone to continue to do well against the US dollar and a test on last year's low set in mid-July near NOK6.5725 is likely here in Q1 10. This in part reflects broad based dollar weakness we expect as the Dec gains are unwound. In part this reflect the krone's gains over the euro. Although technical indicators are a bit stretched, given the fairly steady euro slide since mid-December, there does not appear to be divergences yet or a turn yet. Note that the euro has not risen above its previous day high against the krone in several sessions and has the NY session higher only once since Xmas.

Initial resistance is seen near NOK8.18. Support is seen near NOK8.12, but we see potential toward NOK8.0 as Norway's positives outshine the euro zone.