Norges Bank preview: “Normalization” imminent, implications for USD/NOK

The Norges Bank is poised to fire a potential “shot heard ‘round the world” this week.

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With most major developed central banks only just starting to “talk about talking about” normalizing monetary policy (see our full FOMC meeting preview for more), the Norges Bank is poised to fire a potential “shot heard ‘round the world” this week.

Between a relatively well-managed response to the COVID pandemic and oil prices rallying to 2+ year highs, the oil-dependent Norwegian economy is recovering faster than many of its peers. Indeed, last month’s Regional Network Survey in the country showed a sharply accelerating growth outlook with businesses expecting “substantial output growth ahead” across all sectors. The report also revealed plans to increase investment and employment in addition signs of rising cost pressures. In other words, the Norwegian economy is humming along a poised to accelerate over the coming months, raising the risk that the Norges Bank’s crisis-driven 0% interest rate is too easy and risks creating detrimental inflation.

Heading into Thursday’s meeting, traders and economists are expecting the Norges Bank to lay the groundwork for a rate hike at its September meeting, which would make it by far the first central bank in the G10 to start normalizing monetary policy. Perhaps more importantly for markets, the bank could hint that it plans to embark on a cycle of rate hikes, with another raise possible as soon as December if the economy remains strong.

Technical view: USD/NOK

As any new FX trader quickly learns, changes to central bank interest rates are arguably the biggest catalyst for currency market moves. While Governor Øystein Olsen and Company haven’t been shy about communicating their desire to normalize policy in recent months, the stark contrast between an imminent rate hike (or two) from the Norges Bank and the rest of the developed world unlikely to raise interest rates until late 2022 at the earliest could still boost the NOK against its rivals.

Technically speaking, the Norwegian krone has been the second-strongest major currency so far this year, behind only the similarly oil-driven Canadian dollar. Looking at the USD/NOK chart, rates formed a double top in Q4 of last year and have been trending gradually lower (showing NOK strength against the USD) ever since. The pair remains below both its downward-trending 50- and 100-day EMAs, and the slight recovery over the last six weeks appears corrective, rather than marking an end to the longer-term bearish trend:

Source: TradingView, StoneX

If the Norges Bank does strike a hawkish tone and hint at multiple rate hikes this year, USD/NOK could resume its longer-term downtrend. In that case, more aggressive traders may want to consider short positions on a break of last week’s low near 8.25 for a possible continuation toward 8.00 in time. Conversely, even if the Norges Bank is more cautious than some expect, prolonged weakness in the NOK (strength in USD/NOK) is seen as unlikely given the high likelihood that Norway will embark on the path to monetary policy normalization far sooner than its major developed rivals.

Check out my colleague Joe Perry’s thorough “Currency Pair of the Week” report on USD/NOK for more insight on this pair!

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