Bank of America Recommends Shorting NOK/SEK on Diverging Growth, Rate Outlooks

Bank of America has recommended shorting the Norwegian krone against the Swedish krona (NOK/SEK), citing a growing divergence in the economic and monetary policy outlooks for the two Scandinavian neighbors.

In a note to clients, the bank's strategists suggested entering a short position at 1.0124. The trade recommendation includes a price target of 0.9812 and a stop-loss level at 1.0267. If the target is reached, the trade would represent a potential decline of approximately 3.1% from the entry point.

Economic and Policy Divergence

The core of Bank of America's thesis rests on diverging domestic fundamentals. The bank points to internal data showing Sweden's economy is accelerating while Norway's is showing signs of cooling. This economic split is increasingly reflected in central bank expectations.

According to the note, the probability of an interest rate hike from Sweden's Riksbank is rising, creating a more favorable rate environment for the Swedish krona. Conversely, the likelihood of a rate hike from Norway's Norges Bank is seen as decreasing. BofA also noted that the broader external macroeconomic backdrop is shifting in favor of the SEK, and with the NOK/SEK pair trading near two-year highs, it presents an attractive entry point for the trade.

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Potential Risks to the Trade

Bank of America also outlined several key risks that could invalidate the short NOK/SEK recommendation. These potential threats include:

• A re-acceleration of inflation in Norway, which could force the Norges Bank to adopt a more hawkish stance.
• A turn towards weaker economic data from Sweden, which would undermine the case for a strong krona.
• Another significant surge in oil prices, which typically benefits the currency of oil-exporting Norway.