Norway Bucks the Trend

It’s not exactly fresh news, but last week the Norwegian central bank raised rates for a third time in a year, on this occasion from 1% to 1.25%. Further increases look likely too, and possibly as early as September. The impact of last week’s move sent the NOK- the Norwegian Krone, higher across the board, rising more than one percent against its major counterparts, the EUR and the USD.

However, until most recently the NOK has not been having its own way and has been under a good deal of pressure relative to levels’ a decade or so ago, particularly versus the EUR, as per the chart below.

As you can see the NOK has been falling for much of the past decade, so buying the EUR versus the NOK has been pretty much a one way bet over the past 5-7 years, rising from around 7.5 in 2012, to just above 10 at the very back end of last year. Consequently, its been a similar story for the USDNOK over the same period, which lifted from levels below 5.5 to touch 9.00 and currently stands at around 8.5.

Certainly, the weakness of the NOK over the past decade has had a big impact on Norwegian inflation and directly helped to push that above the central bank’s 2% target. Perhaps it’s therefore entirely understandable that the Norges Bank should now be raising rates to counter that, with the specific aim of sending their currency higher. Moreover, such a policy shift right now is very much at odds with just about anywhere else one cares to look.

Understandably, given that the Norwegian economy is so linked to the price of oil, the most recent falls in the oil price over the past year have done the NOK few favours either. However, when one looks beyond that and delves deeper into other economic fundamentals of the economy, the weakness of the currency over this period doesn’t entirely stack up.

The Norwegian economy is currently growing at above 2.5% and has a headline unemployment rate of around 2%- you’ll be hard pushed to find anywhere else with an unemployment rate that low. The current account surplus speaks for itselfreally as does the model on which the whole economy is based. Norway is one the richest nations on the planet measured by GDP per capita.

The most recent 1.75% sovereign 7-8 Year bond issue was so heavily oversubscribed over par that the yield on that is barely above 1.35%. Hence, its hardly surprising when one looks down across the Baltic sea towards Germany and their negative yields, to understand why Norway and its currency might now pose something of an attractive proposition, especially given its current levels. The prospect of the ECB, possibly cutting in September, could only serve to widen the interest rate differential further.

Whilst I certainly subscribe to the view, that right now the NOK surely has further upside, its not always as simple as that. One does have to remember just how closely tied the NOK is to the oil price. Hence, one can never simply take a view on one without paying very close attention to the other.

However, most immediately the price of oil is looking like its might have found a base ahead of the next OPEC gathering- time will tell on that of course. The other issue to note for the NOK is that the economy in relative terms is just so small and relatively closed. Its certainly not easy for large wholesale investors to find the instruments and liquidity they need in order to invest in size.

Nevertheless, at current levels, the NOK does look appealing right now and certainly something to consider if one is looking for a positive carry outside of the US and away from the cost of running long in almost anything else European, not to mention a central bank that’s clearly is concerned about the weakness of its currency.

That last point brings me to mention the latest from the US president and his opposing stance on his own currency, with such a determined, almost vitriolic desire to see the dollar fall. As I mentioned earlier this week; his war against his own currency and central bank is hardly news to anyone now given his incessant twittering against both. Personally, speaking I think he’s going far too far in his condemnation of the Fed and its chair, and needs to exercise some restraint- not easy perhaps when one’s ego is just so much bigger than the Whitehouse in which one resides!

Important Economic Releases Due the Rest of This Week

27/06- 1.00pm German June CPI Report

27/06- 1.30pm Final Revision to US Q1 GDP Estimate

28/06- G20 Leaders Summit gets underway in Osaka, Japan

28/06- 10.00am Eurozone June CPI Report

28/06- 1.30pm Canadian April GDP Estimate

28/06- 1.30pm US May Personal Income/Spending Report

28/06- 2.45pm Chicago June PMI Index