NOK can’t replace CHF as a fiscal safe haven

NOK can’t replace CHF as a fiscal safe haven

 Norway has the strongest fiscal and external position of
any developed economy (chart 1). We have long argued,
however, that this is not sufficient for NOK to function
as an effective safe-haven to the market disorder
triggered by sovereign stress in more over levered
economies.
 The problem is that as an oil exporter, the Norwegian
economy is vulnerable to any economic dislocations
resulting from unchecked Euro area stress. The Norges
Bank underscored this point of view when it decided to
initiate its easing cycle with a full 50bp cut in response to
the downturn in growth and increased tail-risk. NOK is
not as sensitive to global economic growth or interest
rates as SEK. Nonetheless, the scope for the Norges
Bank to deliver further rate cuts should prevent
EUR/NOK substantially violating the recent multi-year
low of 7.50 (which was set in the immediate aftermath of
the SNB’s announcement of a currency peg, when
investors were scrambling to find the next safe-haven and
inflows into NOK hit an all-time high).
 NOK’s inability to function as a true safe-haven is
illustrated in the currency’s s trade-weighted sensitivity
to equity markets – the correlation remains resolutely
positive –chart 2
 Current fair-value for EUR/NOK based on short rate
differentials and oil prices is around 7.80 (chart 3).
 We have slightly lowered our forecasts for EUR/NOK
but the broad picture remains the same – general stability
with a slight negative bias to reflect NOK’s interest rate
advantage and positive bias to our oil forecast. Brent is
expected to end the year at $120/bl, which all else equal
should be worth 1.5% of NOK appreciation versus EUR.
The relatively low sensitivity of NOK to oil remains a
function of the automatic partial recycling of the current
account benefits of higher oil prices though the
government’s Pension Fund.

J.P. Morgan Forecasts NOK

Potential trigger events NOK

 Despite the sharp reversal and potential for an extension
from the September ’11 low, the broad consolidation
phase remains intact. The key test for the short term
setup enters at the 7.65/7.59 support area. This area
includes the key retracement levels and where the cross
should base if prices are to seek a retest of the medium
term range highs. Initial resistance enters at the 7.72/7.75
zone with breaks setting the stage for a closer test of the
7.83 area if not the critical 7.90 zone which includes the
September peak. Importantly, this upper boundary will
define whether a more sustained breakout phase is
underway (note the large inverse head and shoulders
basing pattern since Jan’11). Alternately, a failure to hold
the 7.59 support area would raise the risk that a deeper
pullback is underway initially into the 7.4884 September
low.