Norwegian Krone: More Relief

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The Norwegian Krone can continue to extend its relief rally, says one of Europe's biggest banks.

A strategy note from Crédit Agricole says a recent spell of weakness "has seemingly gone too far" and recommends the NOK as a buy against the EUR.

The call comes after a significant decline in the Krone through July, with the trough-to-peak move in the Euro-Krone exchange rate reaching 6.25%. The Pound-Krone advance stood at 6.73% by July 24.

NOK exchange rates have since recovered, "despite a tepid recovery of late, the NOK remains on track to end at the bottom of July’s G10 FX ranking," says Alexandre Dolci, FX Strategist at Crédit Agricole.

Reasons for the Krone's decline include its "highest-beta" nature that sees it underperform when equity market volatility rises.

Underperformance also comes in the context of the big unravelling of carry trades across FX markets seen this month, highlighted by the significant recovery in the Yen.

"Yet, this month’s correction has seemingly gone too far as we entered a short EUR/NOK trace recommendation last week. The NOK could especially rely on one of the most hawkish G10 central banks left out there, while prospects of calmer global markets are still needed," says Dolci.

Further support can come on any eventual reduction in the expected FX purchases for Norway’s wealth fund next month, which "may lend the NOK a slight hand," says Dolci.

"Smaller petroleum-related payments due to the shift to a forward schedule in H2 could call for that, although the government may decide to carry on at roughly the same pace due to the likely catch-up operations proposed for next year," he adds.