Fundamentals to support reversal of NOK underperformance in 2021 - MUFG

FXStreet notes that the Norwegian krone has underperformed relative to the euro and the Swedish krona in 2020. Economists at MUFG Bank expect higher oil prices to offer more support for NOK in 2021 while yield spreads should move back more in favour of NOK in 2021. Therefore, the NOK is set to rebound in the year ahead against both the EUR and SEK. 

“We expect the NOK to continue to gradually recover lost ground against the EUR and SEK in the year ahead as the negative COVID-19 shock fades. EUR/NOK and NOK/SEK are currently testing important resistance levels at 10.500 and at just above 0.9600 which could open the door to further NOK gains.”

“The price of Brent crude oil has risen back above $50/barrel. The performance of the NOK has become more closely correlated with the price of oil this year and we expect the NOK to remain more tightly linked to the price of oil in the year ahead.”

“The NOK should continue to benefit from the Norges Bank’s relatively hawkish policy stance. The Norges Bank brought forward plans for the first rate hike by around six months on the back of earlier vaccine roll-out, a relatively well contained second COVID-19 wave in Norway and a strong housing market. In contrast, the ECB and Riksbank are facing increasing pressures from strengthening currencies to consider lowering rates further.”