The NOK is at the core of this latest phase of the reflation trade – TDS

The Norwegian krone is the best-performing G10 currency against the USD since the November election, gaining 12%. Norway's domestic fundamentals remain constructive, but global factors dominate. This process now looks increasingly mature. Economists at TD Securities think the NOK's high exposure to these elements could soon become a source of vulnerability rather than strength.

Key quotes

“The reflation theme looks overpriced across the range of global markets. At the same time, we think the market may be a bit too sanguine about the recent backup in term premium. This puts risky assets in a potentially vulnerable position. While an immediate catalyst for a correction remains elusive, we think the market's sensitivity to such an event has started to build.”

“Norway's domestic fundamentals remain sound, but krone's heavy exposure to these drivers suggests it could take a significant hit from any wider repricing in the market's reflation expectations.” 

“We remain fairly bullish on the NOK's longer-term outlook. Ahead of that, a less favourable near-term environment for risk appetite could expose positioning risks that have built up steadily in recent weeks. This argues for a more cautious stance on the NOK for now, particularly as liquidity can quickly become scarce if the market becomes too one-sided. From a medium-term perspective, however, we would probably welcome such a move. With Norway's domestic factors looking to remain positive, we can easily envision returning to a buy-on-dips stance once the overhang of latent NOK longs is cleared.”