The increase in retail prices in the Norwegian economy was fairly broad based. Price increases in transport services and personal transport equipment were accompanied by moderate food-price inflation. Prices for clothing followed a positive year-on-year reading in the month of August, while prices on audio visual equipment achieved its first positive year-on-year result since the summer of 1994.
Norway’s August CPI soared to 3.2% Y/Y while consensus reading is at 3.0%, while underlying CPI reached 2.5% Y/Y with consensus analyst estimate at 1.8% Y/Y. Inflation has trended higher over the past several months and this latest result confirms that trend. The Norges Bank had assumed a rate of 1.5% Y/Y for underlying CPI, while interpreting that inflation is now a full percentage point above its assumptions.
BNP Paribas argued that EUR/NOK FX rate is far too strong relative to interest rate differentials and the current reading is a strong catalyst for NOK appreciation, especially since many leveraged players had sold the NOK aggressively following the weak GDP data. A short position on FX rate of EUR/NOK was recommended by the broker with target at 7.80.
Meanwhile, Barclays views that Norges Bank will sharpen its forward looking guidance significantly. Norges Bank left policy rates unchanged last June, but signalled a consensus 50% probability for a 25 bps cut at the coming policy meeting. However, after this upside surprise they see no room for another rate cut.
The broker expect likewise that Norges Bank will hike its own policy rate forecast quite larger and signal that the next move likely is a rate hike, probably around the first half of year 2014. However, forex brokers have to wait for Norges Bank’s regional network survey which will be released to get a clearer idea on the potential timing of a rate hike.
Commodity Currencies Boost
The relationship between commodity prices and the NOK is more complex than those of other commodity currencies. Despite being dependent on the oil sector, the NOK is not particularly sensitive to changes in oil prices.
The FX rate of the Australian dollar is supported by the results of the elections and stronger IP and retail sales data of China. It made a positive impact in the commodity currencies market like CAD which a traded in a more welcoming tone.
August business confidence improved to a two year high to a +6 from -3, ahead of release of the August employment report.
The AUD/USD continues to edge higher. Barclays said that targets are approaching in the 0.9320 territory and from that point their analysts would be anticipating for signs of a top mark.
North America is supported by a stronger CAD thanks to firmer building permits. Economists have a consensus estimate of a drop to 180,000 in housing starts. However, there have been few signs of a disruptive housing correction in Canada that has been on the market’s fear radar for some time.
A key driver suggesting scope for some further near-term rebound for commodity currencies is short speculative positioning, which remains significant.