BNY's Geoff Yu highlights that the Norwegian Krone (NOK) and Australian Dollar (AUD) are currently favored among G10 currencies due to their energy-linked profiles and hawkish-leaning central banks, which could benefit from positive energy-related terms-of-trade shocks [1]. Both currencies are large natural gas producers, and recent positioning has reflected expectations of near-term gains, with the iFlow indicator showing selective interest in assets tied to energy surges [1].
However, Yu cautions that Norges Bank's FX transactions historically act as a significant headwind for NOK appreciation. When energy prices rise and improve Norway's fiscal position, any surplus to the non-oil budget deficit prompts Norges Bank to sell NOK and purchase foreign currency for the Government Pension Fund Global [1]. During the previous energy surge from 2022 to 2023, daily FX transactions reached NOK 4bn, creating a strong marginal headwind against further NOK gains [1].
Currently, Norges Bank's FX flows are marginally positive for NOK, but Yu warns that these flows tend to reverse once sustained energy price rallies occur and the initial terms-of-trade adjustment is complete [1]. He advises caution against excessive NOK positioning based solely on energy receipts, noting that the central bank's actions could limit further appreciation [1].
Looking ahead, Yu expects Norges Bank's upcoming policy stance to mirror the Reserve Bank of Australia's approach, maintaining vigilance on external factors while emphasizing domestic inflation as the key policy driver [1].
CONCLUSION
While NOK and AUD are favored for their energy-linked attributes and hawkish central banks, Norges Bank's FX flows pose a significant headwind to sustained NOK appreciation. Investors are advised to be cautious about excessive NOK positioning based solely on energy receipts, as central bank actions may limit further gains.