London Nov 4, 2017 USD/NOK outlook Erica Blomgren, Chief Strategist Norway +47 2282 7277, erica.blomgren@seb.no
Trend in USD/NOK set by EUR/USD Our macro projections paint an optimistic picture of the global economy with annual GDP growth of nearly 4% in 2017-2019. FX markets are doing most of the work for central banks. 2
Short-term USD outlook: Fed expectations to lift the USD US inflation to rise and Fed to hike more than what s currently priced by markets. Jerome Powell as a new Fed Chair = unchanged policy 3
Short-term USD outlook: The revival of the dollar The USD is too weak against the EUR judging by its traditional correlation with relative rates. Speculative positioning is near record-long EUR/USD. EUR/USD down to 1.13-1.15 in Q4 and Q1-2018. 4
Long-term USD outlook: The retreat of the dollar Structural rebalancing will continue to weigh on the dollar: 1. Global reserve managers USD exposure at unsustainable high levels 2. Stronger global growth have generated inflows to EM currencies 3. Euro zone attracts portfolio inflows EUR/USD to stabilize in a 1.20-1.25 range 5
NOK should recouple with fundamentals: But not necessarily due to oil A weaker correlation between NOK and oil is reasonable. Asymmetric impact from oil. 6
NOK should recouple with fundamentals: Disappointing economic data Sharply lower inflation has weighed on NOK. Most Norwegian economic data have disappointed relative to consensus expectations recently. 7
NOK should recouple with fundamentals: Economic recovery firing on all cylinders Mainland GDP growth has accelerated so far this year and the outlook remains very positive. We are above consensus and Norges Bank on mainland GDP growth. 8
NOK should recouple with fundamentals: Norges Bank s game-changer Overlooking low inflation readings in the short-term. We expect a first rate hike in December 2018. 9
NOK should recouple with fundamentals: NOK-weakness not supported by fundamentals Dovish spill-over effects from the ECB s decision. Broad-based dollar appreciation and generally weaker Scandies. 10
USD/NOK short-term: No quick recovery in the NOK Fed to render support to the USD in Q4 and Q1-18, taking EUR/USD to 1.13-1.15. The seasonality in November and December argues against an imminent rebound in NOK. Thin(er) liquidity makes the NOK vulnerable whenever exposed to corrections. USD/NOK Seasonality EUR/NOK Seasonality Year Nov Dec Year Nov Dec 2002-1,5-5,4 2002-1,2 0,0 2003-4,2-2,2 2003-0,7 2,7 2004-3,5-1,0 2004 0,1 1,0 2005 3,6 0,1 2005 1,9 0,6 2006-6,1 1,3 2006-2,4 0,9 2007 3,2-1,9 2007 4,2-2,2 2008 4,2-0,8 2008 3,8 8,8 2009-0,8 2,0 2009 1,1-2,8 2010 6,0-6,4 2010-1,2-3,4 2011 3,8 3,5 2011 0,8-0,2 2012-0,5-1,9 2012-0,3-0,3 2013 3,1-0,9 2013 3,1 0,2 2014 4,1 5,8 2014 3,5 2,9 2015 2,5 1,7 2015-1,6 4,5 2016 3,2 1,3 2016-0,5 0,7 11
USD/NOK long-term: Substantially lower in 2018-2019 Fundamentals such as growth, monetary policy, and flows suggest NOK will recover long-term. EUR/USD stabilising in a 1.20-1.25 range. LTFV in USD/NOK at 7.36 (SEBEER: 7.96). Low inflation this year to lower fair value in 2018. 12
USD/NOK summary EUR/NOK forecast 01/11/2017 1m Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q4 19 9,48 9,50 9,50 9,35 9,15 9,10 8,90 8,60 USD/NOK forecast 01/11/2017 1m Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q4 19 7,95 8,12 8,26 7,99 7,63 7,52 7,24 6,88 EUR/USD forecast 01/11/2017 1m Q3 17 Q4 17 Q1 18 Q2 18 Q4 18 Q4 19 1,1755 1,17 1,15 1,17 1,20 1,21 1,23 1,25 Short-term (0-6m): Higher: OPEC drops the supply cap Lower: No Dec hike (Fed), Strong Norwegian data/hawkish NB Long-term (6m-3y): Higher: Aggressive Fed hikes, Norwegian housing collapse Lower: ECB with an early tapering, oil prices Strategy: Use near-term rallies to hedge the downside via a combination of forwards and options/rr. If you need to protect against NOK weakness shortterm, consider to hedge now (buy USD calls/fwds). 13
Disclaimer Important: This statement affects your rights All research (reports, studies and publications) produced by SEB Merchant Banking, a division of Skandinaviska Enskilda Banken AB (publ) ("the Bank"), is produced for institutional investors only. It is not intended for private clients or Private Customers (as defined by the UK Financial Services Authority, (the "FSA )) and must not be distributed to private clients or Private Customers. The Bank has offices in Copenhagen, Frankfurt, Helsinki, London, New York, Oslo, Paris, Singapore and Stockholm. This report is produced for private information of recipients and SEB Merchant Banking's research department is not soliciting any action based upon it. Opinions contained in this research report represent SEB Merchant Banking's research department present opinion only and are subject to change without notice. All information contained in this report has been compiled in good faith from sources believed to be reliable. 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Appendix
Economic recovery firing on all cylinders Mainland GDP: 2.0% 2017, 2.3% in 2018 and 2019 Broad-based recovery: revival in private consumption, rebounding exports and strong investments. Recovery in petroleum-related activity, with positive secondary effects. Trend-shift in home prices, driven by a surge in supply of new homes. Prices will drift lower in the coming 12 months, but no price collapse expected. Improvements in labour markets and household real income growth to support consumption. 16
Growth momentum levelling out a solid pace The aggregated output indicator points to 0.5-0.6% q/q growth in H2 17
Mainland investment has led the recovery Share of mainland investment (%, 2016): Business 41%, Residential 31%, Public 28% 18
Mixed outlook for non-oil investments Residential investment growth slowing. Business investment to accelerate. 19
Oil investment reached a trough in late 2016 Oil investment: 0% in 2017, 2.5% in 2018 and 5.0% in 2019 Lower oil price break-even levels and low reserve replacement ratios oil investment and the Norwegian economy is less sensitive towards fluctuations in oil prices. Statistics Norway s oil investment survey implies small declines in 2017-2018, but is likely to be lifted. 20
The oil investment survey is too bearish Note: The survey estimate is in nominal terms NOK bn % Act. Estimate for 2017 % total 2016 Q2/16 Q3/16 Q4/16 Q1/17 Q2/17 Q3/17 17 vs. 16 Total 100 163 155 152 147 149 154 156-4,7 Exploration 17,1 23 27 26 22 18 22 23-1,4 Field development 29,5 54 47 48 51 54 56 56 4,3 - goods and services --- 46 38 40 43 46 48 48 4,3 - production drilling --- 8 9 8 8 8 9 9 4,0 Fields on stream 40,3 68 63 62 61 64 64 64-5,2 - goods and services --- 19 17 17 18 21 19 19-0,4 - production drilling --- 49 46 45 43 43 45 45-7,0 Onshore activities 5,4 8 5 5 5 4 5 4-49,9 Shutdow n etc. 5,5 9 11 8 5 6 6 6-35,0 Pipeline transport 2,2 1 3 3 2 2 2 2 92,1 NOK bn % Exp. Estimate for 2018 % total 2017 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 18 vs. 17 Total 100 156 144 142-8,9 Exploration 17,1 23 26,8 24 5,1 Field development 29,5 56 46,7 47-16,7 - goods and services --- 48 37,3 37-21,8 - production drilling --- 9 9,4 10 10,9 Fields on stream 40,3 64 60,1 61-5,4 - goods and services --- 19 14,2 15-22,9 - production drilling --- 45 45,9 46 1,9 Onshore activities 5,4 4 2,1 2-55,6 Shutdow n etc. 5,5 6 6,1 6 6,5 Pipeline transport 2,2 2 2,1 2-9,2 Note: % chg is measured for 2017 vs. actual outcome in 2016, for 2018 vs. expected outcome 2017 21
Lower break-evens trigger new developments APA 2017: Record high interest in exploration 22
Positive spill-over effects to manufacturing The cyclical turnaround taking hold in the oil sector is already visible in positive secondary effects 23
Rebound in mainland exports Petroleum-related exports to blame for the plunge in 2016 Norw ay's main export markets Exports of goods excl. oil/gas and ships, % share 1995 2005 2010 2016 Europe 80,4 76,7 67,0 68,2 Sw eden 13,7 12,7 10,7 9,6 Germany 14,5 10,2 8,7 7,7 UK 11,6 11,0 7,8 7,7 Netherlands 5,4 7,4 7,5 8,9 Denmark 7,4 6,4 4,9 5,8 France 6,1 4,5 4,6 4,2 Rest Europe 21,8 24,6 22,8 24,3 US 6,0 8,0 9,4 6,7 Asia 11,3 13,0 25,8 26,0 China 0,7 2,0 4,1 4,8 Japan 3,2 2,6 2,9 2,6 Rest Asia 5,1 5,3 10,4 10,3 Norwegian exports % of total Services 25,0 Goods 75,0 Oil and gas 47,2 Traditional goods, of w hich 26,7 Agriculture, forestry and fishing 12,1 Food and food products 10,7 Refrined petroleum products 9,1 Chemical products 15,8 Metals 19,6 Machinery and equipment 24,3 Other products 8,4 24
A revival in private consumption 25
Solid improvement in labour markets 26
Job growth picking up LFS employment lagging the national accounts 27
Lower home prices, but no collapse High home ownership, a favourable tax regime and a strong transmission mechanism. Correction related to a surge in the supply of new homes. Stricter lending practices have put a lid on credit availability, but existing home sales has been relatively steady. Fundamentals remain supportive. Prices expected to drift lower in 2017 and H1 2018, thereafter stable. 28
A surge in supply of new homes 29
Stricter mortgage regulation limits credit growth Mortgage lending rules effective Jan 1 st 2017 and expiring Jun 30 th 2018. The rules are based on the previous framework, proposals from the FSA and supplementary comments from other organisations. The new mortgage rules from Jan 2017: Total debt shall not exceed 5x gross annual income (new). Assessment must include an interest rate hike of 5ppt- Maximum LTV of 85%. 60% limit for loans without repayment obligation rammekreditt (prev. 70%). All loans secured by the property shall be included in the LTV calculation ie joint debt in condominium etc. Additional collateral in the form of a mortgage on another property etc. can be included in the LTV calculation. For mortgages that exceeds LTV of 60%, an annual amortization of minimum 2.5% is required or alternatively the amount corresponding to a loan maturity of 30y (prev. exceeds 70%). Each bank may grant loans that do not meet one or more of the terms above up to 10% of the value of approved loans each quarter i.e. the flexibility quota. Rules only applies to new loans, and should not affect refinancing of existing mortgages as long as the existing terms are unchanged. Temporary and specific rules for Oslo (new): Maximum LTV for second mortgages in Oslo is limited to 60% and the flexibility quota is set to 8% instead of 10%. 30
Inflation below target SEB s forecast is below Norges Bank s trajectory from the Sep17 MPR Inflation has fallen rapidly, driven by previous NOK appreciation, but will stabilize going forward. A larger-than normal decline in food prices in August downside risk to the short-term outlook. Norges Bank is focusing on rising capacity utilisation inflation to rise over the medium term. 31
Turn in NOK suggests CPI-ATE is bottoming out Imported goods accounts for 30% of CPI-ATE. Rule of thumb: 1% weaker exchange rate slightly less that 0.1%-point higher inflation after 12 months. Pay hikes will remain well below the historical average throughout forecast period and a generally low international price pressure mean the upturn in CPI-ATE will be very gradual. 32
A small step for Norges Bank, a giant leap for markets The hawkish change is in line with our own key rate forecast, but admittedly occurred earlier than what we had predicted. Conviction in the economic recovery has increased: The recovery has gained speed and labour markets are improving faster than expected. Less uncertainty related to the housing market: Falling home prices not expected to lend substantial negative effects on domestic demand, while risks related to household debt remains high. Overlooking low CPI-ATE inflation in the short-term: The 2018 forecast was lowered marginally to 1.5%. But inflation is nonetheless expected to have reached a trough in August Rising capacity utilisation suggests inflation will pick up further out: Inflation is still well-below target throughout the forecasting period, but the long-term projections for CPI-ATE, wage growth and the output gap were lifted. 33
We expect a December 2018 hike Norges Bank s growth projections are still too cautious growth (and labour market) data should carry on surprising on the upside. Short-term surprises to CPI-ATE (the 2018 estimate is still on the high-side) should not be decisive for the rate outlook (or NOK). Norges Bank is likely to nudge its rate path higher in coming MPRs. 34
Market pricing for Norges Bank Market Sep17 path SEB Rate chg Rate chg Rate chg 21.09.2017 0,50 0 0,50 0 0,50 0 26.10.2017 0,50 0 0,50 0 0,50 0 14.12.2017 0,50 0 0,50 0 0,50 0 25.01.2018 0,50 0 0,50 0 0,50 0 15.03.2018 0,50 0 0,50 0 0,50 0 03.05.2018 0,53 3 0,51 1 0,50 0 21.06.2018 0,54 1 0,52 1 0,50 0 16.08.2018 0,58 4 0,53 1 0,50 0 20.09.2018 0,59 1 0,55 2 0,50 0 25.10.2018 0,62 3 0,58 3 0,50 0 13.12.2018 0,69 7 0,60 2 0,75 25 24.01.2019 0,69 0 0,62 2 0,75 0 14.03.2019 0,73 4 0,65 3 0,75 0 02.05.2019 0,76 3 0,67 2 0,75 0 20.06.2019 0,81 5 0,71 4 1,00 25 15.08.2019 0,86 5 0,77 6 1,00 0 19.09.2019 0,89 3 0,82 5 1,00 0 24.10.2019 0,91 2 0,86 4 1,00 0 12.12.2019 0,97 6 0,90 4 1,25 25 23.01.2020 1,03 6 0,98 8 --- --- 12.03.2020 1,05 2 1,03 5 --- --- 07.05.2020 1,09 4 1,15 12 --- --- 18.06.2020 1,14 5 1,22 7 --- --- 13.08.2020 1,15 1 1,28 6 --- --- 24.09.2020 1,21 6 1,35 7 --- --- 22.10.2020 1,23 2 1,45 10 --- --- 17.12.2020 --- --- 1,50 5 --- --- * We have assumed a credit spread of 30-50bps ** Meeting dates for 2019-2020 are our guesstimates 35
Disclaimer Important: This statement affects your rights All research (reports, studies and publications) produced by SEB Merchant Banking, a division of Skandinaviska Enskilda Banken AB (publ) ("the Bank"), is produced for institutional investors only. It is not intended for private clients or Private Customers (as defined by the UK Financial Services Authority, (the "FSA )) and must not be distributed to private clients or Private Customers. The Bank has offices in Copenhagen, Frankfurt, Helsinki, London, New York, Oslo, Paris, Singapore and Stockholm. This report is produced for private information of recipients and SEB Merchant Banking's research department is not soliciting any action based upon it. Opinions contained in this research report represent SEB Merchant Banking's research department present opinion only and are subject to change without notice. All information contained in this report has been compiled in good faith from sources believed to be reliable. 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Distribution This research report has been prepared by SEB or its affiliates and is being distributed by SEB offices in Stockholm, Copenhagen, Oslo, Helsinki, Frankfurt, London, Tallinn, Vilnius, Singapore and Hong Kong. Research reports are prepared and distributed in Lithuania by AB SEB bankas and in Estonia by AS SEB Pank in accordance with the requirements of the local laws and Financial Supervision Authority s conduct of business rules. It is being distributed in the United States by SEB Securities Inc. ('SEBSI'), a wholly owned subsidiary of SEB organized under the laws of the State of Delaware, USA. Any United States institutional investor receiving the report, who wishes to obtain further information or to effect a transaction in any security discussed in the report, should do so only through SEBSI and not its affiliates. Addresses and Phone numbers for each office can be found at the end of the report. 36