Morning Brief – How Many?!

How Many?!

In case you were getting worried about the relative calm in foreign exchange markets, you might not need to fear for much longer. With as many as six central bank meetings this week, there is the potential for a whole host of chaos to play out in the foreign exchange market. A decision from the Swedish central bank, the Riksbank, will precede a decision by US Federal Reserve and the Bank of Japan on Wednesday. On super Thursday, the Bank of England, Norges Bank (Norway) and Swiss National Bank will all publish decisions of their own. Each of these central banks has their own idiosyncratic challenges to deal with. However, they all share one universal challenge: in the face of rising inflation, how to maintain favourable financing conditions to support recovery whilst maintaining credibility.

It is perhaps the Norwegian Krone that has the most to gain from the decision this week. An election last week in Norway saw some political risk being priced out of the currency, allowing NOK-termed currency pairs to fall. Despite the transition of power to the centre-left of the political spectrum, the passing of the risk event manifested in the election meant that stronger levels of investor confidence have bolstered demand for the Krone. Rising wholesale costs of energy have also encouraged demand for the Krone given Norway’s presence in the oil and gas market and its abundance of natural-resource-derived wealth. Skyrocketing wholesale gas prices as we wrote about yesterday are feeding into wholesale energy and oil markets too. The UK government’s own action and response plan to rising energy prices even lists the North Sea pipeline between Norway and the UK as a key alternative to stave off UK energy shortages this winter.

Yesterday too, Norway committed to exporting more oil to Europe this winter, which at current prices will create even stronger capital flows into the country. The external demand flowing into Norway has allowed the Norges Bank a preferential position to deal with the challenge of balancing rising inflation whilst maintaining credible yet accommodative financing conditions. External demand has supported the economic recovery in Norway and therefore allowed the central bank breathing room to normalise monetary policy and restrict the monetary support provided throughout the pandemic.

In line with this position, the Norges Bank has signposted a rate hike this month since their last policy meeting. Given the credibility of this hike, it is likely fully priced into the spot price of NOK today. However, it is the new rate-path projections that could provide further upside to the Krone. The money market is not pricing in another rate hike this year, however, it is possible that the central bank could put this on the table at their policy meeting this week. It is also possible that the 100 basis points worth of tightening projected by the end of 2022 could be further endowed by the Bank’s comments and forecasts this week.

Discussion and Analysis by Charles Porter

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