GBP and NOK in focus ahead of FOMC

Today’s obvious focus is the US FOMC meeting much later today, but in the meantime, we’ve got a couple of important event risks for GBP and NOK in the form of BoE minutes and the Norges Bank rate decision.

Hard to believe that it isn’t topping all of the new services today, but we’ve got a massive news item out of the US the bears directly on today’s FOMC meeting and all future Fed activities: here we’re talking about the news that Boehner and the House Republican leadership have penned a missive to Fed Chairman Bernanke that asks the Fed to “refrain from further stimulus” as this Bloomberg article puts it, in order to avoid “further harm” to the economy. This is a tremendous development – a drawing of a line in the sand. How will the Fed respond, not so much today, but in the weeks and months to come?

BoE Minutes
The BoE minutes are squarely in focus for the UK today (to be published at 0830 GMT), as continued relatively weak data combined with still uncomfortably high inflation levels paint an ugly picture for sterling, which has fallen precipitously versus the greenback and the yen of late on the expectation that the next round of QE is nigh. Looking at the status in the charts, one wonders how much more the market is willing to punish the currency even assuming the BoE September meeting minutes show the MPC gearing up for another round of asset purchases. Certainly from a rate differential perspective, the GBPUSD move appears overdone, though that pair may move more on tonight’s FOMC meeting than . EURGBP may be a better indicator on the market’s sentiment toward sterling.

Norges Bank
As we have previously discussed, the Scandies received some degree of interest as safe haven currencies in the wake of the SNB’s declared war on the strengthening franc earlier this month, but EURNOK quickly righted itself after a brief swoon. Norges Bank will be out declaring its interest rate policy today at 1200 GMT. The increasing dovishness of the central bank has seen the forward expectations fall from +60 bps in July to about -60 bps at present. EURNOK is not priced fairly according to that movement, obviously as the market is also pricing Euro according to the latest sovereign debt woes. But further reminders from the Norges Bank that it doesn’t like NOK appreciating too much or that its stance is relatively dovish could see the NOK  lose some more of its shine. Our position is that viewing the NOK as a safe haven currency is a difficult proposition – the attraction of the impeccable sovereign balance sheet is undeniable, but the currency has a more compelling history as a petro-currency and its relatively thin liquidity more or less disqualifies it for true safe haven status.

It will be interesting to see how the Norges Bank discusses the housing bubble, which is the only factor that has kept rates as high as they are. The job of suppressing further bubble risks, however, may fall more toward the Financial Supervisory Authority with possible new tougher rules, rather than to the Norges Bank.

Chart: EURNOK
EURNOK rebounded from new multi-year lows recently, as the market shied back from the break lower, a reversal that has somewhat neutralized the downtrend. Does today’s Norges Bank finally see the pair pull back higher through the 200-day moving average? (black line).



Chart: EURNOK vs. interest rate spreads
The NOK has already been outperforming the indications from interest rate spreads due to the Euro’s unique sovereign debt situation, but the premium for NOK has been particularly large of late as rate expectations for the Norges Bank have crumbled.