The Norwegian krona has been one of the hardest hit currencies by the SARS-CoV-2 outbreak. While the NOK is down over 5% YTD there remain reasons to remain optimistic. The krona's relatively high interest rate remains attractive and the expectation remains for economic data to remain strong.
Prior to the SARS-CoV-2, the NOK was strengthening on the back of the US-China Phase 1 deal and December's mini oil rally. Once the risks around the SARS-CoV-2 outbreak begin to fade, there is scope for the NOK to rebound in a similar fashion to last December. This view is supported by the expectation that domestic demand will remain resilient as it is being driven by oil investments, consumer consumption and a pullback in policy uncertainty.
With regards to the last point, history has shown that the markets have a tendency to look through Norwegian economic data during times of uncertainty. Case in point, in 2019, the markets looked through Norwegian data that was arguably the strongest in the European G10 and focused on measures of uncertainty such as the Economic Policy Uncertainty Index. As such, it seems reasonable to think that a pullback in uncertainty should push the NOK higher.
We continue to expect that the US-China trade truce will hold at least through the election and that the UK Brexit transition period will be extended. Should both of these hold true, uncertainty will clearly be reduced. Moreover, the UK is Norway's largest trading partner, and any positive in UK-EU talks is also NOK positive. Of course, the NOK's fate still remains tied to supportive oil prices. So while the view remains constructive, the krona remains highly sensitive to global risk. "
EURUSD ended its losing streak by finishing last week slightly higher. This was the result of better-than-expected Eurozone PMI, including a significant improvement on the German manufacturing PMI series. Additionally, the USD came under pressure as the US services PMI series missed and moved into contractionary territory. Ultimately, Europe has a larger exposure to China than the US. While recent data appears to show limited SARS-CoV-2 impact on Europe, this should eventually change. Near term consolidation is possible given the big move down, but the medium term view remains for euro weakness.
Sterling was under pressure last week as hopes for additional fiscal stimulus were dashed and brinksmanship on UK-EU trade talks continued. Positive PMI data at the end of the week brought some relief for the GBP although it was slightly mitigated by underlying details hinting at supply chain concerns. Ultimately, the view remains bearish with the USD and UK-EU trade negotiation headlines expected to be near term drivers.
USDJPY made a sharp move up last week in a move that caught markets off guard. However, we view this range break more as a catch up to USD strength than idiosyncratic yen weakness. Since the beginning of the year, the USD has been on a tear. Additionally, unhedged investment outflows have been at record levels. Prior to this week, safe haven demand due to COVID-19 concerns have delayed USDJPY's reaction to the above weakening pressure. Looking ahead, the ability for USDJPY to continue to move higher will depend on the ability of US data to deliver positive surprises. Until then, expected USDJPY to continue range trading albeit in a higher range.
Last week was a busy week of data for Canada with manufacturing sales missing estimates and retail sales and CPI broadly coming in line with estimates. Overall, it doesn't appear that the outlook for Canadian GDP materially changed due to these data points. For now, Canadian data appears to be solidifying (see recent jobs report), but the CAD is not immune to risk off events, leaving it vulnerable to SARS-CoV-2 virus headlines.
The coronavirus outbreak continues to dominate the headlines. The end of last week saw a spike in confirmed cases as China revised its official number for the 3rd time in a month. This continued change puts further uncertainty around the narrative that the outbreak is peaking. Additionally, the number of outbreaks outside of China has spiked with South Korea in particular focus. In the near term, SARS-CoV-2 headlines remain a key driver but expect currency stability absent any materially negative virus headlines. However, it should be noted that recent fixes have been about the 7.0 level, illustrating a willingness on China's part to trade above 7.0.
Weak US data helped the AUD move up last Friday, but AUDUSD was down overall last week. SARS-CoV-2 concerns resurfaced last week as there was a spike in the number of cases outside of China. Moreover, 3 revisions to the number of cases in China within 1 month have raised concerns over the accuracy of China's data and the narrative that the outbreak is peaking. On a domestic front, the latest employment report showed an uptick in the unemployment rate, hinting at labor market weakness. Expect the AUD to be range bound with a weakening bias.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain at 0.25%
Expectations for rates to remain at 1.25%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
US Consumer Confidence
Expectations for a 132.0 print
US New Home Sales
Expectations for a 713K print
US Durable Goods
Expectations for a -1.5% decline
Canadian GDP MoM
Expectations for a 0.1% increase
German IFO Business Climate and Expectations
Expectations for a 95.3 and 92.1 print, respectively
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