Norwegian krone gains after oil price jump, dollar quickly goes in red (Daily analysis 3.04.2023)

The dollar exchange rate started the quarter on an upward note, but EUR/USD quickly rebounded to 1.0850. Strong midday gains in oil prices following the shock OPEC+ production cut are in the spotlight on Monday. The Norwegian krone benefits and a turnaround in energy markets could be negative for the euro and put off inflation easing. Later in the week, US data will be important.

Norwegian krone: Brent exchange rate appreciates, NOK gains

The start of the festive week was dominated by the reaction to the weekend's cut in oil production by the signatories of the OPEC+ agreement. The scale of the additional voluntary reduction is around 1.1 million barrels per day, which corresponds to roughly 1% of daily crude consumption. The Saudi Arabia decision, whose production from May onwards after a 500,000-barrel cut will be below 10 million b/d for the first time since 2021, comes as a shock. Firstly, oil prices, which had collapsed in the face of March's financial turmoil, had managed to rebound and make up more than half of the discount before the end of March. At most, the market could anticipate the need for an emergency meeting to discuss the situation. The OPEC+ countries' intolerance for oil prices in the range of 70-80 USD proved to be underestimated.

Moreover, demand is unchangeably expected to increase (by around 2 million b/d this year), influenced mainly by the recovery in China after the abandonment of restrictive pandemic restrictions. After the surprise move, the crude market will move more quickly into a deficit, which will be deeper. We had already forecast that crude prices would rise this year, but the Brent variety has no potential to exceed 90 USD permanently. This, together with Norges Bank policy, was supposed to help end the weakness of the Norwegian krone (the weakest of the main currencies in 2023) and support the Canadian dollar. Now there is a risk of stronger rallies in crude prices towards 100 USD per barrel. These will make it more difficult to dampen price pressures.

Dollar: USD may not be helped even by a good labour market report

Recently, data from the US economy went a bit off the rails. After all, any statistics depicting economic prosperity before the collapse of Silicon Valley Bank and the emergence of financial stability concerns represent prehistory for the markets. That will only change this week, which begins with the publication of the main barometer of industrial sentiment, the ISM index (4 pm CET). The corresponding sentiment index for services will be known on Wednesday. A reading of private sector employment estimates also falls on that day (at 2:15 pm) as a preview to Friday's Department of Labor report (2:30 pm). The rate of new payroll creation is expected to fall from 311,000 to less than 250,000, with the unemployment rate remaining at 3.6% and a repeat of the lowest wage growth in a year (0.2 m/m%). The reaction to weak data may be more pronounced than to good readings, but it should also be remembered that some financial centres are closed on Friday and Monday, and investor activity will be lower.