FX Forecast Update - Danske Analyse - Danske Bank

EUR/NOK – edging lower despite Norges Bank being on alert• Growth. Mainland GDP growth has recovered in Q1,with both retail sales and manufacturing productionrising indicating that Q4 was a ‘temporary soft patch’.We expect mainland growth at 3.0% y/y in 2013.• Monetary policy. Due to low inflation and a moderatewage agreement Norges Bank lowered its rate pathsignificantly in March. However, Norges Bank leftrates unchanged at the May meeting, referring to theweaker NOK. With our forecasts for growth, inflationand the NOK, we expect Norges Bank to be on hold forthe next 12 months.• Flows. Norges Bank has purchased a modest amountof foreign currency here in Q1 and the revised budgetpoints to an even lower amount ahead. We have seenstrong foreign interest for NGBs over the past twoyears, which might now peter out and even reversegiven the better risk environment. Note that accordingto the weekly flow data speculators have stronglyscaled down long NOK positions this year.• Valuation. NOK is still slightly overvalued, withEUR/NOK PPP at 7.79.• Risks. Norges Bank cutting rates due to low inflation.Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.com, +45 45 12 85 32Forecast: 7.45 (3M), 7.40 (6M) and 7.35 (12M)8.258.007.757.507.257.00EUR/NOK6.75May-12 Aug-12 Dec-12 Mar-13 Jun-13 Sep-13 Jan-14 Apr-1475% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstEUR/NOK 1M 3M 6M 12MForecast (pct'ile) 7.50 (36%) 7.45 (34%) 7.40 (32%) 7.35 (33%)Fwd. / Consensus 7.55 / 7.51 7.54 / 7.47 7.54 / 7.40 7.54 / 7.3450% confidence int. 7.46 / 7.64 7.39 / 7.68 7.33 / 7.73 7.24 / 7.8075% confidence int. 7.39 / 7.71 7.28 / 7.80 7.17 / 7.90 6.99 / 8.02Source: Danske Bank MarketsConclusion. We expect EUR/NOK to edge lower as arate cut now looks less likely. However, Norges Bank isstill focused on the currency and it is likely that thecentral bank will from time to time try to interveneverbally in the FX market, as EUR/NOK edges lowerover the next 12 months. Note that our forecasts arebased on the USD, GBP and SEK appreciating on abroad base (6 to 12 months), so the trade-weightedNOK does not become ‘too strong’ for Norges Bank.www.danskebank.com/CI13