9 January 2014 FX Blueprint: Thin end of the wedge Theme 1t4: - Swiss NOK'd-out We can think of three reasons to go short CHF/N0K. 1. The relative cycle is supportive of rate differentials. Inflation is at a much higher starting point in Norway than in Switzerland, leaving the Norges Bank much less room to manoeuvre than the SNB in the event of upside surprises to import prices or stronger European growth. Market pricing in Norway has evolved rapidly from three months ago, with the first hike now expected in 03 2015 rather than 01 2014, more or less in line with the Norges' own projections. N0K is also much better placed to benefit from a stronger US cycle with one of the strongest correlations to US growth, and CHF one of the weakest. One risk is house prices, which have risen precipitately in Norway over the last five years, a sharp reversal of which could weigh on domestic demand and prompt Norges' dovishness. We think the risks of this are slim, however, (see theme #6). and moderate falls will be welcomed by the central bank as skimming froth from the market. 2. Swiss safe-haven unwind should follow Norway's. Like Switzerland, Norway experienced large-scale safe haven inflows as a consequence of the financial crisis, helping to pause customary current account surplus recycling. In the latter's case, these inflows have largely reversed, to the tune of N0K 190bn on a 2y/2y basis). This has been one of the primary recent drags on the krone, but appears to have largely run its course, in contrast to Switzerland where it has yet to begin. 3. CHF also more vulnerable to domestic outflows. As well as the foreign inflow, Norway and Switzerland both saw significant repatriation of domestic assets from abroad. Again, this flow has long turned in Norway but not yet in Switzerland. One possible catalyst will be stronger price pressures next year on the back of more robust growth. This should erode real returns Swiss domestics have enjoy