Krone Doesn't Take Crown for Top Forecasters on Norway Currency

(Bloomberg) -- Market pundits may be getting carried away by this year's prospects for the Norwegian krone, according to the currency's top forecasters.

Bayerische Landesbank, which had the most accurate prognosis on the currency last quarter, is expecting a 1 percent loss in the krone against the euro, while Julius Baer Group Ltd. is “very cautious”. That compares with an almost 4 percent strengthening seen in a Bloomberg survey, the biggest appreciation forecast among major currencies.

While neither of the top two forecasters foresee a repeat of the 2017 slide of 8 percent in the krone versus the euro, they hold on to a lackadaisical view. This hinges on a predicted weakness in oil prices, a central bank restricted by low inflation and uncertainty on when the European Central Bank will move to tighten policy. Concern about Norway's housing market also clouds the outlook.

“We are not that optimistic,” said Manuel Andersch, who compiles BayernLB's forecasts. “I don't think we will see anything too aggressive from the Norges Bank this year or even the beginning of 2019 as long as the ECB is cautious. It also is a function of the oil price which we don't expect any impetus from.”

BayernLB's forecast for the pair at 9.80 kroner-per-euro by the end of this year is the second-most bearish, after Morgan Stanley's 10.20 call. While not far from the current level of 9.67 kroner-per-euro, it mirrors Julius Baer's view.

“The krone will not be able to realize its potential until inflation picks up again and the central bank can move into the normalization mode, which we don't expect this year,” said David Alexander Meier, a senior economist at Julius Baer. Meier said while the bank was looking to publish fresh forecasts soon, it has a neutral stance and doesn't really share “the optimistic consensus.”

Despite the Norges Bank signaling last month that its first interest-rate hike could come at the end of 2018, its prediction that inflation may not pick up to 2 percent until 2020 has tempered hawkish views among analysts. Data last month showed headline inflation at 1.1 percent in November, the lowest in four years and far off policy makers' 2.5 percent target.

The krone also faces headwinds from the recent slump in Norway's housing market, which drove the currency toward a near all-time low in December. Data released Thursday showed prices extended losses at the end of last year, adding to concerns an economic recovery may be derailed.

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Danske Bank A/S, which was also among the most accurate dollar-kroner forecasters, remains unperturbed. Its top two trades for 2018 involve betting on the Norwegian currency's appreciation versus both the euro and the Swedish krona. It sees a rate hike in December, a stabilizing housing market and oil prices climbing, and predicts the krone at 9.10 to the euro in 12 months.

“Norway has quite extraordinarily avoided recession unlike many other commodity-exporting nations,” said Kristoffer Kjaer Lomholt, a senior analyst at Danske. “The krone is one of the most fundamentally undervalued currency in the G-10 space, which means as growth picks up there is a correction potential which can undo the weakening seen last year. There's quite a fundamental, compelling case on why the nokkie should move higher in 2018.”

Julius Baer's Meier said prudence is warranted. “There is potential here, but the backdrop for it to realize its potential needs more time to unfold,” he said.

--With assistance from Wei Lu

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Marco Bertacche

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