Goldman Sachs sees Scandinavian currencies strengthening against dollar

Goldman Sachs forecasts the Norwegian krone (NOK) and Swedish krona (SEK) will strengthen against the U.S. dollar in the coming months, with a slight preference for SEK, citing ongoing dollar hedging programs and global asset reallocations. While EUR/NOK and EUR/SEK are expected to gradually decline, the outlook is tempered by potential risks, including reduced risk appetite, a continued U.S. economic slowdown, and for NOK, a bearish oil price outlook and the upcoming Norwegian general election, although significant sovereign wealth fund policy shifts are considered low probability.

Analysis

Goldman Sachs projects that the Norwegian krone (NOK) and Swedish krona (SEK) are positioned to appreciate against the U.S. dollar in the upcoming months, with a marginal preference for the SEK. The bank's rationale is predicated on supportive structural flows, including ongoing dollar hedging programs and global asset reallocation away from U.S. markets. Consequently, Goldman anticipates both the EUR/NOK and EUR/SEK exchange rates will trend lower towards the firm’s three-month targets. However, this outlook is tempered by significant risks, particularly during periods of reduced risk appetite or a U.S. economic slowdown, which could lead to underperformance for both currencies, especially the NOK. For the Norwegian krone specifically, Goldman's bearish short-term outlook on oil prices presents a notable headwind. Furthermore, the Norwegian general election on September 8 is identified as a key risk event, where a victory by parties advocating for looser restrictions on the sovereign wealth fund's foreign currency repatriation could create upside for the NOK. Despite this, Goldman Sachs assesses the probability of such a policy shift as low, citing historical resistance to altering the fund's mandate and current polling data.

Key Decisions for Investors

• Investors could consider establishing long positions in SEK and NOK against the USD, while noting Goldman Sachs' slight preference for SEK due to its comparatively lower sensitivity to commodity price fluctuations and global risk sentiment.
• For those holding or considering NOK positions, it is crucial to monitor oil price trends and political developments leading up to the Norwegian general election on September 8, as these factors are identified as primary drivers of potential underperformance.
• A potential strategy includes positioning for a decline in the EUR/SEK and EUR/NOK pairs, which directly aligns with Goldman's forecast for Scandinavian currency strength relative to the Euro.
• Although considered a low-probability event, traders should watch for any material shift in Norwegian election polls favoring parties that support altering the sovereign wealth fund's mandate, as this could serve as a significant, high-impact catalyst for NOK appreciation.