As the most volatile currency in the expanded major currency space over the past week, the Norwegian krone has been swept away in the worsening virus-driven economic knockout and was hit by the double whammy of a strengthening dollar and a collapse in oil markets.
Norges Bank cut interest rates by a total of 125 bp over a time span of 8 days, leaving little room to cut further before the central bank must consider negative rates or unconventional policy measures. Despite all this, NOK has managed to pare back some of its losses in the past 2 days – arguably riding on the coattails of an improvement in crude oil markets.
Europe’s main oil exporter is suffering from a worse economic shock than during the global financial crisis, as the collapse in oil prices combined with the virus shock has practically brought the domestic economy to a halt. Norway closed schools and airports mid-March in an attempt to contain the virus spread, and pledged a large fiscal spending package in the form of loans and guarantees to local companies on top of that. Prime Minister Erna Solberg stated on Friday that “the government will do what is required and spend the money that is needed to safeguard the Norwegian economy and get businesses through this crisis”, possibly referring to Norway’s enormous sovereign wealth fund. The Oil Fund was established two decades ago to invest profits from the Norwegian oil markets and has over US$1 tln in assets.
With the Federal Reserve announcing a wide range of massive measures on Monday, including $75 bn Treasury securities and $50 bn agency mortgage-backed securities on a daily basis and a host of additional measures, the Fed has put the last of their chips into the pot to fix the USD funding crunch.
NOK certainly found support in the Fed’s actions and managed to prolong its gains in the late session yesterday.
This morning, the Norwegian krone continued to impress and ripped over more than 5% higher against both the dollar and the euro as oil markets seem to find their footing, while European equity markets are climbing as well.
Further developments in oil markets, global risk aversion and gasping for dollar may determine the score for NOK after it all, but for now the single currency managed to recover from its historical lows relatively smoothly given global circumstances.
Chart: USDNOK falling over 5% in today’s early trading session
Chart: NOK strengthening against the euro and dollar after the Fed’s open-ended QE announcement
Charts: NOK still weakening against both currencies in the 1m and 1y window
Author: Ima Sammani, Junior FX Market Analyst.