The Norwegian krone has been one of the standout major currencies this year, and Rabobank's Jane Foley believes it still has room to strengthen against the euro, just not right away. In her latest assessment, Foley expects EUR/NOK to trade close to the 11.00 mark over the next one to three months before the pair moves lower on a six-month horizon. That call rests almost entirely on one question: how much further Norges Bank is prepared to push interest rates.
Why the krone's rally matters
The krone remains one of the strongest currencies in the G10 group this year. Since the start of the year it has rallied roughly 6.85% against the euro, and it has held on to most of that strength even after giving back some of its year-to-date gains last month. A move of that size signals that investors have been drawn to Norway's economy and its relatively high interest rates. As Foley puts it, the krone has rallied around 6.85% versus the euro since the start of the year.
The Norges Bank question
Where the krone heads next depends largely on the central bank's next step. Norges Bank raised rates by 25 bps in May, taking the benchmark to 4.25%. Since then, softer Norwegian inflation has cooled expectations for further tightening. The picture became clearer after a softer June CPI print. What stands out is that even though the central bank's messaging last month leaned hawkish, the market is pricing in only 17 bps of rate hikes on a six-month view. In other words, investors think the room for more aggressive tightening is limited.
Where EUR/NOK goes next
Because of those doubts over further Norges Bank hikes, Foley expects EUR/NOK to stay close to the 11.00 level over a one-to-three-month window. During that stretch, she sees scope for choppy, range-bound trading around the 11.00 area. "We expect EUR/NOK to stay close to the 11.00 level on a 1-to-3-month view," Foley says. After that, the picture shifts. Rabobank believes the pair will find fresh momentum to push lower on a six-month view. A lower EUR/NOK is effectively a signal of a stronger krone, since it means fewer krone are needed to buy one euro. So while prices may stay boxed in over the short term, the medium-term lean is toward krone strength.
The euro side of the equation
The other half of this equation is the euro's own behaviour. According to live market data, EUR/USD is currently trading near 1.14, down about 0.14% from the previous close, within a 52-week range of 1.13 to 1.20. On the technical side, RSI(14) sits at 42, neither overbought nor oversold but leaning slightly soft. The price is below both its EMA50 and EMA200 and remains in a long-term downtrend, with the EMA50 sitting under the EMA200 in what is known as a death cross. An ADX(14) reading of 24 suggests there is no strong trend in place, with range-bound action dominating. This general euro softness fits neatly with Foley's view that EUR/NOK is more likely to drift within a range first and then edge lower, rather than lurch in one direction.
What it all means for traders
Rabobank's view essentially points to a range-trading strategy: buying and selling around 11.00 in the short term, and betting on krone strength over the medium term. Softening Norwegian inflation and fading expectations for Norges Bank rate action are the two big factors that will shape the pair over the coming weeks. If the krone's rate-driven gains this year hold up, Foley's six-month call for a lower EUR/NOK, and a firmer krone, could well play out.
