Brown Brothers Harriman’s Elias Haddad (BBH) notes that May Consumer Price Index (CPI) in Norway could be pivotal, with a hot print potentially bringing forward another Norges Bank hike after its surprise May move. While USD/NOK is expected to follow broad Dollar strength, Haddad argues Norwegian Krone (NOK) can still outperform on crosses thanks to favorable terms of trade and fiscal space.

Norwegian inflation keeps hike risk alive

"Norway May CPI is due Wednesday. Headline is expected at 3.1% y/y vs. 3.4% in April and underlying CPI is seen at 3.3% y/y vs. 3.2% in April."

"The Norges Bank projects both CPI and underlying CPI at 3.3% y/y in May. A hot inflation print can bring forward the timing of the next Norges Bank rate hike."

"At its last May 6 meeting, the Norges Bank unexpectedly raised rates 25bps to 4.25% and left the door open for another hike by year-end because “inflation is too high and has run above target for several years.” The swaps curve price in a full 25bps hike to 4.50% in November."

"USD/NOK is unlikely to buck the trend of broad USD strength. But NOK can keep outperforming on the crosses the longer the energy price shock persists."

"Norway gets the terms of trade boost and has fiscal space to absorb some of the growth drag to domestic demand."

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