BNY’s Geoff Yu notes that the Norwegian Krone (NOK) and Australian Dollar (AUD) are currently favored in G10 as energy-linked, high-beta currencies with hawkish-leaning central banks. However, he warns that Norges Bank’s FX transactions historically turn into sizeable NOK selling once higher energy prices feed through to the fiscal position, limiting further NOK gains. Yu cautions against excessive NOK positioning purely on energy receipts.

Energy tailwind offset by Norges Bank flows

"iFlow shows a retreat to traditional safe havens – such as the dollar, Swiss franc, U.S. Treasuries and Bunds – alongside selective positioning in assets that could benefit from a positive, energy-related terms-of-trade shock. In G10 markets, AUD and NOK are the two currencies most favored in this context. Both are large natural gas producers with hawkish-leaning central banks to complement terms-of-trade improvements."

"Both currencies could benefit in the near term, and Norges Bank’s view next week will likely resemble the RBA’s – adding to vigilance on the external side while stressing that domestic inflation will remain the key policy driver."

"We stress, however, that Norges Bank’s FX transactions – marginally positive for NOK now – tend to reverse once energy prices sustain a rally and the initial terms-of-trade adjustment runs its course."

"Any surplus to the non-oil budget deficit will result in Norges Bank selling NOK and purchasing foreign currency for the Government Pension Fund Global."

"During the previous energy surge in 2022 to 2023, daily FX transactions hit NOK 4bn – a strong marginal headwind against further NOK appreciation."

"Without taking a view on the duration of the current energy price surge, we would be wary of excessive NOK positioning based simply on energy receipts."

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