Rate hike bets send Norway's crown to 4-1/2 month highs

LONDON: The Norwegian crown climbed towards its highest levels in more than four months against its Swedish rival on Monday after strong inflation data raised expectations the central bank could increase interest rates as early as this month.

Norwegian core CPI data for February was 2.6 percent on an annualised basis, above a Reuters forecast of 2.1 percent and well above the central bank's long-term target of 2.0 percent.

"Core inflation data was considerably higher than market expectations and that is helping the crown especially after the ECB news last week," said Manuel Oliveri, a currency strategist at Credit Agricole in London who recommends going long on the crown against the euro.

Against the dollar, the crown gained 0.6 percent to 8.6870 crowns per dollar. It rose by half a percent against the euro at 9.77 crowns per euro.

Against the Swedish crown, it rallied more than 0.5 percent to 1.0831 crowns, nearing its highest levels since October 2018, hit in mid-February.

With markets trading in a period of low volatility, investors have rushed to buy currencies where central banks are still raising interest rates or economic data has exceeded expectations, indicating a brighter economic outlook.

"This makes (a) March rate hike from Norges Bank a complete done deal, which is a positive for the currency," Nordea strategists said.

Norges Bank last year tightened monetary policy for the first time since 2011, lifting its rate to 0.75 percent from a record-low 0.5 percent.

The central bank has said it aims to raise rates another five times by the end of 2021. It next meets on March 21 and Bank of America Merrill Lynch strategists expect a rate hike.

CARRY TRADES PROSPER

The optimism over Norway's economic outlook was in contrast to the general caution over the broader European economy after the European Central Bank slashed its growth forecasts for 2019 and postponed its expectations of a first rate hike.

That has emboldened investors to add to their short euro bets after weak data in recent weeks.

Short euro bets, already near a 2-1/2 year high, according to latest futures positioning data for the week ending March 5  are likely to receive a further boost in the coming days, investors said.

The single currency edged 0.2 percent higher at $1.1247 after falling 1.2 percent last week, its biggest weekly loss in more than six months.

A carry trade strategy or borrowing in low-yielding currencies and investing in relatively higher-yielding ones has reaped rich rewards.

For example, borrowing in an equal-weighted basket of euros, Swiss francs and investing in a basket of U.S. dollars, Australian dollars and Norwegian crowns would have yielded a net return of 2.6 percent in less than three months, according to Refinitiv data.

Sterling came under renewed pressure as British Prime Minister Theresa May was warned by eurosceptic lawmakers that her Brexit divorce deal would be rejected by parliament for a second time.

The pound briefly dipped to a three-week low of $1.2945 in Asian trading before recouping most of its losses.

Reflecting the broader market nervousness before a series of key votes in parliament this week, gauges of expected market volatility in the pound ticked higher across the board.