Most G10 currencies are rushing forwards, but the Norwegian krone has failed to make a good start. However, a change in the energy resources market's structure in Europe and a pause in global monetary restriction will change the USDNOK's positions. Let’s discuss that and make a trading plan.
Monthly fundamental forecast for Norwegian krone
Favorites usually look powerful, but outsiders often win races. They can fish in troubled waters. Such a volatile and uncertain environment as Forex is hard to find somewhere else. So, don't be confused about the Norwegian krone's outsider position at the beginning of 2023. This currency is not only a dark horse but also a secret favorite. Deutsche Bank calls it the world's most undervalued currency, whereas Morgan Stanley expects the USDNOK to drop 15% in 2023.
Two factors explain the krone's weak start in 2023: the fall of gas prices to the lowest in more than one year in Europe and a pause in Norges Bank's monetary policy tightening. The main interest rate was kept at 2.75% in January but will likely be raised in March. Everything will depend on incoming data. The main reason for such a verdict is an inflation slowdown to 7-month lows at 5.9% in December. Oslo probably thought October’s 7.5% was the peak.
Norwegian inflation and central bank rates
Source: Trading Economics.
When the Fed and the majority of developed economies' central banks continue monetary restrictions, and the Bank of Norway makes a pause, the krone must weaken. But the global situation implies that the rest will have to suspend interest rate raising soon. Thus, the Scandinavian currency will become attractive again, even more so because Norway will have room to raise borrowing costs. According to Norges Bank, they may grow to 3%. Nordea forecasts the peak at 3.25%.
True, Norges Bank's "drive range" is smaller than the ECB's, which can raise the rate from 2% to 3.25%. However, the krone's 2.7% depreciation against the euro since the beginning of 2023 suggests that the monetary policy divergence has already been factored in EURNOK quotes. Just like any pleasant surprise from the eurozone's economy. Bloomberg's experts expect Norway's GDP to gain 0.8% in 2023. That's more than 0.1% moderate forecast for the currency bloc.
Falling gas prices also weaken the krone. At the same time, markets underestimate structural changes in Europe's energy sector. Norway replaced Russia in supplying gas to the European Union, so its energy exports grew by 130% last year. The improvement of trade balance and conditions is a powerful argument for selling the USDNOK.
Norway trade balance
Source: Bloomberg.
Monthly trading plan for USDNOK and GBPNOK
The krone can consolidate against the USD amidst the stabilization of gas prices and against European currencies if they grow amidst a drastic recovery of the Chinese economy and growing demand for raw materials. So, I recommend selling the USDNOK in the direction of 9.61 and 9.42 and opening shorts in the GBPNOK with targets of 12 and 11.8.
Price chart of USDNOK in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
