Key Moments
- BNY’s Geoff Yu highlights that stronger energy terms of trade and a relatively hawkish Norges Bank are supportive for NOK, but elevated investor holdings and limited FX purchases are restricting further upside.
- EUR/NOK is described as being only 2.5% above its 12-month low from May, making the near-term risk-reward unattractive compared with energy equities, particularly Norwegian names.
- Norges Bank’s NOK purchases through Q2 were the lightest since buying resumed 12 months ago, and growing energy receipts are seen as a source of downside risk to future FX transactions.
Norges Bank Positioning Seen Curbing Krone Upside
BNY’s Geoff Yu contends that the Norwegian Krone (NOK) is likely to draw interest from investors as markets factor in improved oil and natural gas terms of trade alongside expectations that Norges Bank is among the more hawkish central banks in Western Europe. However, he argues that these positives are being offset by already elevated NOK holdings and restrained central bank FX purchases, which together are limiting the currency’s appreciation potential.
Yu notes that higher energy receipts are cutting the need for non-oil budget-related NOK purchases, which in turn is tempering Norges Bank’s direct support for the currency despite a recent increase in daily buying.
Valuation, Holdings, and Equity Alternatives
Yu observes that NOK remains underpinned by the same fundamental drivers that were in place earlier in the year, but valuations and positioning are now less compelling for additional exposure.
| Market Metric | Detail |
|---|---|
| EUR/NOK level vs 12-month low | Currently only 2.5% away from the 12-month low in May |
| Energy share of MSCI Norway | 29% |
| Energy share of MSCI Europe Index | 4.3% |
According to Yu, these metrics underline why the risk-reward profile in EUR/NOK is not especially attractive at this point, given how close the pair is to its 12-month low. He states that, based purely on positioning, investors may find more appealing opportunities in energy equities, particularly Norwegian stocks, where energy has a significantly higher index weight compared with broader European benchmarks.
Norges Bank FX Operations and Energy Receipts
Yu reiterates earlier concerns raised in Q1 that Norges Bank’s own FX activities are not providing a reinforcing tailwind for NOK and could instead act as a drag. He points out that robust oil receipts imply smaller NOK purchase needs to fund the non-oil budget, dampening the scale of central bank involvement in FX markets.
He highlights that Norges Bank’s buying of NOK during Q2 was the weakest since purchases resumed 12 months earlier, underscoring the limited direct support for the currency from official flows. While a recent move in the market led to an increase in the July FX purchase requirement to NOK 400mn per day, Yu warns that rising energy revenues now introduce downside risk to the overall volume of FX transactions going forward.
When combined with signs of softer domestic inflation and wage dynamics, he concludes that Norges Bank’s backing for NOK, whether through rate policy or FX operations, is likely to remain muted.
Positioning Across Currencies and Commodities
Yu advises against aggressively targeting broad emerging market FX shorts and instead favors using strength in energy and commodities to adjust exposure toward selected high-carry commodity exporters. He specifically points to BRL, CLP, and ZAR as preferred beneficiaries of this approach, while recommending a more cautious stance on NOK.
“In G10, NOK will again find demand as markets price in improved terms of trade from oil and natural gas sales. Additional support may come from Norges Bank being seen as the most hawkish central bank in Western Europe. These factors were already true in March, and holdings remain elevated by iFlow standards.”
“EUR/NOK is currently only 2.5% away from the 12-month low in May, so risk-reward isn’t compelling. On a holdings basis alone, there is better value in adding to energy equities, especially Norwegian ones. Energy comprises 29% of the MSCI Norway, far above the 4.3% share for the MSCI Europe Index.”
“We voiced concern in Q1 that Norges Bank’s own FX transactions would not have any amplification effect and could become a headwind. Oil receipts remain high, which means NOK purchase requirements for the non-oil budget will be relatively low. Norges Bank’s buying of NOK through Q2 was the lightest since purchases restarted 12 months ago.”
“The recent drop pushed the July requirement up to NOK 400mn per day, but there is now downside risk to total transactions as energy receipts grow. Coupled with more subdued domestic inflation and wage growth, Norges Bank support for NOK in all forms will stay tepid.”
“Don’t chase broad EM FX shorts. Use energy and commodity strength to rotate into select high-carry commodity exporters, especially BRL, CLP and ZAR, while staying cautious on NOK.”
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