Risk sentiment creates headwind for the NOK, seeing small gains from confirmed Sept. hike

Risk sentiment creates headwind for the NOK, seeing small gains from confirmed Sept. hike The NOK strengthened only briefly after Norges Bank s meeting last week, as escalating trade tensions are weighing on risk-sensitive currencies like the NOK. EURNOK has edged up towards 9.48 this morning, as sentiment has worsened over the weekend. Increased trade tensions are sending safe havens stronger; with EURCHF and USDJPY dropping lower this morning. EM currencies on the other hand are still under pressure. EURUSD has recovered some of the losses seen after the ECB meeting, up above 1.1650. On this week s calendar the main focus will be the EU Summit in Brussel, while trade tension continue to be in focus as markets await another round of retaliations from China. Data-wise, from Norway, we get LFS unemployment figures, followed by retail sales and registered unemployment figures. Among the G10 the most important data points will be the US and European CPI numbers. The NOK The message from Norges Bank was clear: the key policy rate will be raised in September 2018. The message was accompanied by a slightly higher interest rate path (up 5-10bps), giving a clear signal that Norges Bank is comfortable with raising rates ahead of the ECB (and potentially Riksbanken). Norges Bank expects a stronger NOK, and sees a widening interest rate differential. The new rate path confirms that Norges Bank is set to hike rates two times in 2019 and two times in 2020, despite last month s disappointing inflation numbers. Given the recent signals from the ECB this means that Norges Bank could be hike rates two to three times before the ECB even gets started. On the back of this, the interest rate differential is expected to widen more than in March and Norges Bank forecasts a rather significant NOK strengthening going forward. It expects the import weighted currency index (I-44) to strengthen by close to 6% during the next 12 months (see chart below). Translated into EURNOK-levels this means Norges Bank forecasts that EURNOK will approach 8.90 in 12M. A stronger NOK should thus not restrict Norges Bank from a rate hike. In comparison, we forecast a more gradual strengthening and see EURNOK at 9.10 in 12M. The NOK strengthened but only briefly. EURNOK initially dropped 800 pips towards 9.40, but was back up rather quickly, ending the week close to 9.45. In sum EURNOK is back trading close to where it started last week. The lack of further NOK strengthening could partly be blamed on a sharp drop in the oil price and increased uncertainty ahead of Friday s OPEC meeting. The oil price ended the week down 1.7% after OPEC agreed to increase oil production by 1m barrels/day to ease pressure on the oil price. On top of this escalating trade tensions are weighing on risk sensitive currencies like the NOK, creating a less favourable climate for further NOK strengthening. Market players positing for a stronger NOK seems to prefer playing a stronger NOK against SEK, rather than EUR. NOKSEK gained nearly 1% last week, trading up towards 1.0950. Trade tensions and lower risk appetite are weighing on the NOK. Last week, President Trump threatened to impose new tariffs on another $200bn of Chinese imports and a 20% tariff on all cars imported from the EU. Over the weekend we saw another tit-for-tat move with Trump said restricting Chinese investments in US companies in US sensitive industries. Markets have reacted with risk-off, sending equities lower and safe havens (like the JPY and CHF) stronger this morning. EURNOK continues to show a strong correlation with stocks (e.g. SP500 index), underlining the sensitivity to risk-on/risk-off mode in the market. Norges Bank revised NOK forecast stronger EURNOK sensitive to risk sentiment 110 105 100 95 90 85 I-44 and 3 mth. rate differential 80 Mar-12 Mar-15 Mar-18 Mar-21 I 44 MPR 2/18 I 44 MPR 1/18 3M rdiff. MPR 2/18 (inv, ra) 3M rdiff MPR 1/18 (inv, ra) 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 EURNOK og S&P 500 10.0 9.9 9.8 9.7 9.6 9.5 9.4 Dec-17 Feb-18 Apr-18 Jun-18 EURNOK S&P500 (inv ra) Source: Thomson Datastream/DNB Markets 2550 2650 2750 2850 2950

Market still not convinced of Norges Bank s rate outlook. The market pricing indicates that the market is still not fully convinced of a September hike, and less so for further rate hikes in 2019/2020. Market pricing is only for ~50bp of tightening by year-end 2019, while Norges Bank signals 76bp, which means the market is in for a hawkish surprise if Norges Bank delivers as promised. On the back of this we see potential for further EURNOK downside when Norges Bank moves closer to starting its hiking cycle. We forecast EURNOK at 9.20 on a 3-6M horizon, but see increased upside risk for this forecast as the market sentiment creates increased headwind for the NOK. We find no central banks on this week s calendar, but politicians will be main focus. The main focus out of Norway will be the EU Summit in Brussel (scheduled Thursday and Friday), while trade tension continue to be the main driver as markets await another round of retaliations from China. Among the G10 the most important data points will be the US and European CPI numbers (both due Friday). US PCE core-inflation is expected to edge up from 1.8% to 1.9% y/y, while flash estimates for the Eurozone core-inflation is expected slightly down from 1.1% to 1.0% y/y, underlining the policy divergence we are seeing between the Fed and the ECB. On the data front from Norway we get LFS unemployment figures (Wednesday), expected unchanged at 3.9%, followed by retail sales and registered unemployment figures (Friday). Norges Bank will also publish July numbers for FX sales, expected unchanged at NOK 750bn/day. Majors Stronger GBP as BoE holds the door open for an August hike. Last week s BoE meeting showed that a majority of 6-3 voted to keep rates unchanged. As expected the two external members continued to vote for a rate hike, but were accompanied more surprisingly by the BoE s chief economist Haldane. On growth the BoE sounded relatively upbeat, holding on to the assumption that a weak Q1 was mainly temporary. However a majority of MPC said there was value in seeing how the data evolved from here, in order to learn more about the extent to which conditions were evolving in line with the May Report. A hike in autumn seems likely; the question is if it will be August or November? The market now seems more convinced of the former, with market pricing indicating close to a 70% chance of a rate hike in August. We hold on to our expectation of a November hike, but see increased risk of an earlier hike. EURUSD has recovered somewhat after a sharp drop the week before. After reaching nearly 1.15 on the back of a more dovish ECB outlook, EURUSD ended last week up above the 1.16-level. Increased trade tensions seemed to be weighing on the pair this morning, with the USD in demand as a safe haven. The SEK on a weak note. EURSEK has edged higher ever since the ECB meeting, testing above the 10.30 level this morning. A more dovish outlook from the ECB have strengthened concerns that Riksbanken will postpone the first rate hike, with market pricing now standing at only a 26% chance of a rate hike by year-end. The political climate is not helping for the SEK, with the anti-immigration party Sweden Democrats (SD) gaining ahead of the upcoming election, due on 9 September. Last week head of SD, Jimmie Åkesson, told Dagens Industri that SD will push for a referendum of the EU membership, bringing headline of a swexit. According to recent polls SD is leading as the second or third largest party. SD is the third largest party according to recent polls, but is still likely to have a hard time getting a referendum approved by parliament, as the other Swedish parties are not supportive. Note also that a poll among Swedes performed earlier this year showed that 53% were in favor of EU membership, while 18% where against membership. All in all, a Swedish EU referendum or swexit seem very unlikely. but Jimmie Åkesson could still create some headwind for the SEK going forward. EURSEK edging higher 10.40 10.35 10.30 10.25 10.20 10.15 10.10 10.05 10.00 EURSEK last two weeks 60 min high-low -close 9.95 11-Jun 13-Jun 15-Jun 19-Jun 21-Jun 25-Jun Source: Thomson Reuters / DNB Markets EURUSD recovering somewhat after ECB drop 1.190 1.180 1.170 1.160 1.150 EURUSD last two weeks 60 min high-low -close 1.140 11-Jun 13-Jun 15-Jun 19-Jun 21-Jun 25-Jun Source: Thomson Reuters / DNB Markets

Exchange rates - Actual, forwards and DNB forecasts Actual % change Forw ard DNB Forecast Spot Last 1w Last 12m 3m 12m 1m 3m 12m 24m USDJPY 109.5-0.9% -1.6% 108.8 106.3 109 109 110 108 EURJPY 127.5-0.8% 2.4% 127.5 127.6 128 129 141 143 EURUSD 1.16 0.2% 4.0% 1.17 1.20 1.17 1.18 1.28 1.32 EURGBP 0.88 0.2% -0.1% 0.88 0.89 0.87 0.88 0.92 0.93 EURSEK 10.33 0.8% 5.8% 10.33 10.33 10.20 10.20 9.80 9.20 EURNOK 9.45 0.1% -0.1% 9.48 9.60 9.30 9.20 9.10 9.00 EURCHF 1.15-0.5% 6.1% 1.15 1.15 1.16 1.18 1.20 1.22 GBPUSD 1.32 0.0% 4.2% 1.33 1.35 1.34 1.34 1.39 1.42 USDCNY 6.53 1.5% -4.4% 6.55 6.59 6.35 6.35 6.40 6.70 SEKNOK 91.46-0.8% -5.5% 91.80 92.91 91.18 90.20 92.86 97.83 USDNOK 8.12-0.1% -3.9% 8.09 8.00 7.95 7.80 7.11 6.82 GBPNOK 10.75-0.1% 0.0% 10.76 10.79 10.69 10.45 9.89 9.68 JPYNOK 7.41 0.8% -2.3% 7.44 7.52 7.29 7.15 6.46 6.31 DKKNOK 126.8 0.1% -0.2% 124.8 123.5 122.0 120.6 CHFNOK 821.2 0.6% -5.7% 825.0 838.0 801.7 779.7 758.3 737.7 NOK TWI (I-44)* 103.4 0.3% 2.4% 102.5 101.0 99.0 98.5 A higher trade w eighted NOK (I-44) means w eaker NOK Source Thomson Reuters/DNB Markets Marit Øwre-Johnsen, DNB Markets

Weekly Calendar Week 26 Importance GMT+2 Country Event Period Unit Last Cons. DNB Monday 25 June 01:50 Japan BoJ Summary of opinion from June meeting 10:00 Germany Ifo business climate Jun Index 102.2 101.8 14:30 USA Chicago Fed national activity May Index 0.34 0.30 16:00 USA New home sales May m/m % -1.5 0.8 Tuesday 26 June 16:00 USA Conf. Board consumer confidence Jun Index 128.0 128.0 Wednesday 27 June 08:00 Norway LFS unemployment rate Apr % 3.9 3.9 08:45 France Consumer confidence Jun Index 100 10:00 EMU M3 May y/y % 3.9 11:30 UK BoE Finacial Stability Report 14:30 USA Durable goods orders May m/m % -1.6-1 14:30 USA Durable goods ex transportation May m/m % 0.9 0.5 16:00 USA Pending home sales May m/m % -1.3 1.0 Thursday 28 June 08:00 Germany GfK Consumer Confidence Jul Index 10.7 10.6 08:00 Norway Credit Indicator C2 May y/y % 6.3 6.3 09:30 Sweden Retail sales May m/m % 0.6 0.2 11:00 EMU Consumer confidence Jun Index -0.5 11:00 EMU Economic sentiment indicator Jun Index 112.5 112.1 14:00 Germany Inflation (CPI) Jun y/y % 2.2 2.2 14:30 USA Initial jobless claims 1000 218 14:30 USA GDP, final Q1 q/q % 2.2 2.2 15:30 UK BoE's Haldane speech 19:00 EMU EU Summit press conference with Juncker and Tusk UK Nationwide house prices Jun m/m % -0.2 0.2 Friday 29 June EMU EU Summit continues 01:01 UK GFK Consumer confidence Jun Index -7-7 01:30 Japan Unemployment rate May % 2.5 2.5 01:50 Japan Industrial production May m/m % 0.5-1.0 08:00 Norway Retail sales volume May m/m % 0.6 0.2 09:00 Switzerland KOF leading indicator Jun Index 100 101 09:55 Germany Unemployment rate Jun % 5.2 5.2 10:00 Norway FX Purchases Jul mill. -750-750 10:00 Norway Consumer confidence Jun Index 10:00 Norway Unemployment (reg.) Jun 1000 80.21 79.71 10:30 UK GDP, final Q1 q/q % 0.1 0.1 11:00 EMU Core inflation (CPI), flash Jun y/y % 1.1 1.0 14:30 USA Personal consumption expendituresmay m/m % 0.6 0.4 14:30 USA Personal income May m/m % 0.3 0.4 14:30 USA Core PCE inflation May y/y % 1.8 1.9 16:00 USA UoM consumer sentiment Jun Index 99.3 99.2

DNB Markets Macro Analysis Kjersti Haugland Chief Economist, Norway, euro zone +47 24 16 90 01 / +47 917 23 756 kjersti.haugland@dnb.no Jeanette Strøm Fjære Economist, Norway and Sweden +47 24 16 90 03 / +47 920 37 011 jeanette.strom.fjare@dnb.no Ole A. Kjennerud Economist, China and Japan +47 24 16 90 07 / +47 477 57 482 ole.kjennerud@dnb.no Knut A. Magnussen Senior Economist, USA and UK +47 24 16 90 04 / +47 476 04 046 knut.magnussen@dnb.no Magne Østnor FX Strategist 24 16 90 06 / 907 47 902 magne.ostnor@dnb.no Marit Øwre-Johnsen FX Analyst +47 24 16 90 08 / +47 970 42 190 marit.owre-johnsen@dnb.no Kyrre Aamdal Senior Economist, Norway, Sweden, Fixed Income +47 24 16 90 02 /+47 906 61 112 kyrre.aamdal@dnb.no

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