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Bank of America Recommends Selling NOK/SEK on Diverging Growth and Rate Outlooks
Bank of America has recommended selling the Norwegian krone against the Swedish krona (NOK/SEK), citing a growing divergence in the economic and monetary policy outlooks for the two Scandinavian nations. The firm sees an attractive entry point for the trade with the currency pair currently trading near two-year highs.
The Trade Recommendation
In a note to clients, Bank of America outlined a short position on the NOK/SEK pair, targeting a decline of approximately 3.1% from its suggested entry level. The bank's specific parameters for the trade are:
- Entry: 1.0124
- Target: 0.9812
- Stop-loss: 1.0267
Diverging Economic Fortunes
The core of the bank's thesis rests on contrasting domestic economic data. Analysts point to indicators showing that Sweden's economy is accelerating while Norway's is beginning to cool.
AdThis economic divergence is influencing monetary policy expectations. According to BofA, interest rate probabilities have shifted in favor of the Swedish krona, with an increased likelihood of a rate hike from Sweden's Riksbank and a diminished chance of a hike from Norges Bank in Norway. The external macroeconomic backdrop is also seen as turning more favorable for the Swedish krona.
Key Risks to the Outlook
Bank of America also identified several key risks that could invalidate its recommendation. A primary risk would be a reacceleration in Norwegian inflation, which could pressure Norges Bank to reconsider its stance.
Other potential headwinds for the trade include weaker-than-expected economic data emerging from Sweden or a renewed spike in global oil prices. As a major energy exporter, Norway's krone is often sensitive to fluctuations in the price of crude oil.
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