NOK declines as core inflation falls short of expectations


Norwegian core inflation misses forecasts in the first month of the year  
GDP matches expectations showing decent contributions from all categories except for net exports  
NOK declines as lower inflation might cut back on chances to see the Norges Bank pulling the trigger this year
The Norwegian krone is currently the weakest currency in the G10 basket following a lacklustre reading of inflation for January. Even quite strong GDP growth for the fourth quarter of the past year turned out to be not enough to offset inflationary disappointment. Consequently, the NOK is losing as much as 1.2% against the greenback at the time of writing and some other indicators suggest that the upward move could last for a while.

Norway’s underlying inflation misses the consensus in January.

Core inflation dropped in January to 1.1% from 1.4% in a year-over-year basis while the consensus had indicated an increase to 1.5%. At the same time headline price growth stayed unchanged at 1.6% matching the median estimate. A negative inflation surprise saw the NOK declining immediately as it could act not in favour of the first rate hike this year. Let us remind that the Norwegian monetary authorities see the first increase at the end of the year (December) but having inflation well below the official 2.5% goal one may suspect that a delay could be expected unless it was just one-off decrease.

GDP in a yoy basis slowed down in the Q4, however, it was in line with the consensus.

On the other hand, mainland GDP growth (stripping out oil and shipping) came in at 0.6% qoq in the fourth quarter of 2017 matching expectations. Moreover, the prior value was revised up from 0.6% qoq to 0.7% qoq. The details illustrate that almost all categories added to growth whereas the sole negative contribution came from net exports. The GDP release suggests that the Norwegian economy remains on an appropriate track after slowing down significantly when oil prices crashed. To sum up, one swallow does not make a spring and the other way around as well thus it is too early to judge whether a January’s fall of underlying inflation could morph into a longer-term trend. That said, the forecast assuming the first rate increase in December seems to not be at stake at least for the time being.

Technically, the USDNOK is currently breaking through a 8.00 handle and if it succeeds, it could lead to an extended pullback to the upside. If so, it would suit a possible short-lived comeback of the greenback therefore a move toward a supply zone at 8.41 or slightly beyond it (an upper boundary of the channel) should be taken into consideration. Source: xStation5  
Finally, let us point that the Norwegian krone remains among the most undervalued currencies in the G10 basket, hence it could continue strengthening against the beleaguered US dollar in the long-term. Last but not least, the bond market also favours an increase toward 8.40 based on the 10Y yield differential.