Krone's Bullish Run Against Major Currencies
This month, the US dollar has weakened against all its Group-of-10 peers, with the Norwegian krone gains leading the charge. The krone's impressive year-to-date performance indicates a potential continuation of its rally against the dollar and other major currencies.
Norges Bank's Strategy: Norges Bank is anticipated to cut interest rates later than most of its peers. Despite its low correlation to oil prices, the krone remains robust due to significant interest from traders. Norway’s central bank recently held the deposit rate steady at 4.5% and signaled that tight policy might persist longer than previously expected, prompting increased krone holdings.
NOK/SEK Performance: The Swedish krona recently hit its lowest point against the krone since mid-October, with the exchange rate testing the critical 61.8% Fibonacci retracement level at 1.0115. With Swedish inflation easing more than expected, the Riksbank cut its interest rate for the first time in eight years and signaled potential further cuts. As long as Norges Bank maintains its current stance, the NOK/SEK pair is likely to remain strong.
Krone vs. Canadian Dollar: Predictions of a rally for the krone against the Canadian dollar, due to interest rate differentials, are materializing. Recent data has revived this trade, and December lows are now only 0.9% away, indicating that short positions might soon be reduced.
USD/NOK Volatility: The focus remains on whether the Federal Reserve's monetary policy can support the US dollar. USD/NOK volatility is at its lowest since the pandemic, suggesting a slower trend compared to other krone pairs. The krone is favored for expressing bearish dollar views, with low-yielding currencies like the Swiss franc and yen funding long NOK positions.
As summer approaches, if Norges Bank's policy remains unchanged, the krone's bullish trajectory is expected to continue, despite potential easing bets by money markets.
ECB’s Villeroy Advocates for Possible July Rate Cut Amid Policy Debate
Francois Villeroy de Galhau, a Governing Council member of the European Central Bank (ECB), suggests considering a second rate cut in July. This proposal comes amid resistance from other monetary officials against consecutive rate cuts. Villeroy emphasized the need for “maximum optionality” following the almost certain rate reduction in June, barring major shocks.
In an interview with Germany’s Boersen-Zeitung newspaper, Villeroy stressed the importance of flexibility in monetary policy. While most policymakers agree on the necessity of a June rate cut, there is reluctance to commit to further cuts due to challenges like sticky wage growth, persistent inflation in the services sector, potential increases in energy prices due to Middle Eastern tensions, and delays in US rate cuts.
The ECB’s upcoming 1 and 3-year consumer price index (CPI) expectations, set to be released later today, will be closely monitored. These figures are expected to provide further insight into the inflation outlook and guide the ECB’s future policy decisions. Villeroy’s comments highlight the ongoing debate within the ECB about the best course of action to manage inflation and support economic stability in the Eurozone.
Oil Holds Steady as Gaza Border Clashes Escalate
Oil prices steadied after two days of gains amid rising tensions in the Middle East. An Egyptian soldier was killed in a clash with Israeli troops at the Gaza border, while an Israeli airstrike on Sunday killed at least 40 Palestinians at a camp for displaced people. The death of an Egyptian border guard at the Rafah crossing threatens to escalate tensions with Israel. The airstrike at the camp near Rafah drew international condemnation. Israel admitted the strike caused dozens of deaths, with Prime Minister Benjamin Netanyahu calling it “a tragic mistake” in a Knesset address. The US and other countries expressed concern over the high civilian casualties in Rafah and urged Israel to reduce the assault to prevent further harm to innocents.