Michael Pfister at Commerzbank notes that Norwegian Krone (NOK) has outperformed Swedish Krona (SEK) thanks to Norway’s energy-exporter status during the war-related commodity shock, despite similar rate expectations. He expects this oil-driven strength to partially reverse once the war ends, and still looks for slightly higher EUR/NOK into Q2, arguing that Norwegian monetary-policy risk premia are unlikely to disappear quickly.

War and energy shock reshape NOK path

"Compared to the SEK, the NOK has therefore caught up significantly in recent weeks and has even taken the lead. At first glance, this contradicts our initial analysis, in which we expected the NOK to catch up only later in the year. But this is almost entirely due to the energy price shock: Norway is one of the world’s largest energy exporters, whereas Sweden must import a significant amount of energy."

"In terms of interest rate expectations, there is hardly any difference between the two currencies, even though one might expect the Norwegian real economy to outperform its Swedish counterpart should the energy price shock persist."

"Once the war ends, which we currently expect by the end of May, this energy price-driven performance should reverse somewhat. We therefore adjusted our NOK forecast last week, but we still expect slightly higher EUR/NOK levels by the end of the second quarter, followed by only a slight appreciation."

"In other words, the NOK appreciation we were expecting has largely been priced in. The fact that we do not expect better performance is also due to the fundamentals: Norwegian inflation was already significantly too high before the war in Ukraine, so Norges Bank actually needs to raise interest rates more than the Riksbank does."

"The fact that market expectations have nevertheless only adjusted to a similar extent makes us doubt that the risk premium for Norwegian monetary policy will be priced out anytime soon."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)