At their recent meetings, both the Riksbank and the Norges Bank kept rates unchanged though a clear gap has opened in terms of policy bias with the Riksbank sounding increasingly Dovish and Norges Bank sounding more optimistic.
Riksbank Signal Further Easing
Whilst the Riksbank kept rates unchanged as expected the development of them lowering their repo rate forecast has placed bearish pressure on SEK. Inflation forecasts were also revised lower with CPIF now forecast to average 1.6% in 2017 down from 1.9% originally. A further bearish development was the bank announcing the potential for a QE expansion in December. The possibility of further rate cuts has placed greater pressure on the upcoming October inflation print with a disappointing number likely to fuel an uptick in rate cut expectations.
Regarding a QE extension, the Riksbank noted that they wanted to wait for further inflation data and information from other central banks. If inflation surprises to the upside, a slower rate of purchases into June 2017 is likely whereas if inflation fall is line or misses, the current pace of purchases at SEK 45bln is likely to be maintained.
The statement noted that “prior to the monetary policy meeting in December, the Executive Board is ready to extend the purchases of government bonds further.” This suggests the possibility that the board will announce the extension ahead of the official December meeting, perhaps at an executive board meeting. With this in mind, it seems that the Riksbank might seek to avoid the less liquid conditions of December 21st and instead announce earlier such as the December 14th executive meeting following the December ECB meeting and the domestic November CPI print.
For now, USDSEK remains above the 2015 high and below the 2009 high. SEK bears will be looking for a retest of the broken 2015 high to provide support for another run higher.
Norges Bank Remain Optimistic
The Norwegian central bank struck a different tone with the bank keeping a fairly neutral-to-positive tone, similar to that of the September meeting. The bank noted both positive and negative developments since the September meeting. Positive developments were cited as the continuing strength in domestic economic data as well as stronger Oil prices.
Negative developments were the bank’s lowering of the inflation outlook following a weaker than expected September CPI print, and currency movements with NOK having strengthened more than expected. However, with inflation still well above target, recent weakness is likely to be less concerning for the central bank.
Norges bank also highlighted concerns about the strength in house prices noting that continued strength has exceeded the bank’s expectations. This development supports the idea of less accommodative monetary policy as the bank seek to curb increased household debt, again supporting a higher NOK.
USDNOK continue to range within a triangular formation, keeping pressure on key structural support around the 7.9690s level. A break of this level could signal the completion of a head and shoulders reversal pattern opening up further downside in the pair.
Oil Prices Present Risk To NOK
Oil prices remain a key driver for NOK and whilst there is some uncertainty around the prospects of the proposed OPEC deal going through, there is plenty more upside to come should the deal succeed. Similarly, with rates markets still pricing in further Norges Bank cuts, there is plenty more NOK strength to come as this pricing reduces to reflect lowered rate cut expectations. With inflation still well above target, rate cuts are unlikely to materialise and as such should keep NOK supported.
Developments with the OPEC deal present the most significant near term risk to a bullish NOK bias. The Crude rally, sparked by news of an OPEC deal at the informal talks in late September, has now been wiped out. An increasing number of countries have commented regarding their unwillingness or inability to agree to cuts placing growing scepticism on the likelihood of the deal going through.
However, OPEC approved a document on Monday outlining the group’s long-term strategy, in an encouraging sign that the group is making progress in smoothing out its difficulties. If the OPEC deal is successful and Oil can break above $50, this will be a strongly positive sign for NOK and further increase the divergence between SEK and NOK.