NOK more vulnerable to ECB tightening – Deutsche Bank

With the ECB getting ready to taper, Eurozone term premium is likely to rise which should have greater impact on EUR/NOK than EUR/SEK, consistent with Norway historically seeing less immediate spillover from Eurozone inflation than Sweden, feels the research team at Deutsche Bank.

Key Quotes

“Since the financial crisis, Sweden's yield curve has been more tightly correlated with bunds than Norway's, and EUR/SEK has thus been less responsive to bund yields than EUR/NOK. Beyond the front-end of the curve, it is not clear that EUR/SEK responds at all, while EUR/NOK clearly does. This divergence has become even starker over the past year, as market pricing has tied Riksbank exit from "shadow QE" to ECB tapering, while Norges increasingly seems on its own policy cycle. Hence, if the ECB sticks to current sequencing, EUR/SEK should tread water; if they unexpectedly signaled depo rate hikes before the end of tapering, SEK would also be in trouble, but less so than NOK.”