The Norwegian krone was the worst performing G10 currency in the year to date, reaching 11.7 per USD in Q1 before rallying to current levels of around 9.02. While the oil crash and strong dollar demand in March were the main drivers for the krone’s initial crash, it is the same factors that are now spurring its recovery.
Oil markets are gradually recovering, with both Brent and WTI rising towards a 5-month high at $45.35/b and $42.60/b respectively, lending wings to the Norwegian krone and other petrocurrencies. At the same time, a severe domestic outbreak and political risks are weighing on the US dollar. With a 7-day average of over 1000 deaths per day for a week straight now, the virus outbreak in the US is more widespread than anywhere else in developed markets.
The 7-day average of new daily cases is at around 60,000 nationally but is slowly declining. This will likely show in the deaths figures later on as deaths will typically lag several weeks behind, but the numbers remain excessive relative to the EU and elsewhere.
Across the pond, the euro is enjoying a boost from EU leaders finally reaching an agreement for the EU recovery fund, which removed significant tail risk of fiscal distress in places like Italy. Not only will the fund cushion the blow of the pandemic panic, but it also sends markets a message that the EU is capable of cooperating in times of emergency. As long as risks remain disproportionately centered on the US economy rather than the global economy, and oil markets continue to gradually recover, NOK is likely to hold steady.
Additional points on price action drivers for the Norwegian krone:
- The Norwegian economy has been gradually reopening as lockdown measures were scaled back starting April 20. The domestic macro environment has been improving ever since, and the nation seems to have virus cases under control. Mainland Norway’s GDP rose 2.4% from April to May, while household consumption rose 4.8%. Exports fell by another 4.5% in May after having fallen in March and April already, but this was mainly driven by a decline in metal exports as the automotive and construction industries have been operating at a low ebb. Although Q2 GDP figures for Norway are not yet released, the monthly GDP figures may indicate that the final reading will not be as bad as the figures from the US (-32.9% QoQ) or even the eurozone (-12.1% QoQ). In terms of virus cases, Norway’s new daily case change is substantially lower than its neighbouring countries. In addition, Norway has one of the lowest fatality rates worldwide.
- In major advanced economies, Norway is among the countries that has moved closest to their pre-crisis daily activity levels, while the US is far below its usual level of activity, according to Bloomberg’s activity indicator (chart 1).
- House prices in Norway saw the fastest annual growth in two years between June and July, as the Norges Bank’s rate cut to the effective zero lower bound drove mortgage rates down. Norges Bank stated earlier it aims to keep rates on hold until the second half of 2022.
With the above developments in the US, eurozone and Norway in mind, we expect the Norwegian krone to trade towards the following levels over the 1m, 3m, 6m and 12m horizon.
Norway’s daily activity close to pre-crisis levels in Bloomberg activity indicator
Norway’s net change in cases below neighbouring countries
NOK gains vs EUR today following a boost in oil, but remains unchanged over 1-month window
Author: Ima Sammani, Junior FX Market Analyst