What's going on with the Norwegian krone?

The Norwegian krone has been one of the weakest currencies in 2023 so far, after a rather weak 2022 already. The krone’s 8% fall year-to-date puts it below the yen and even the South African rand.

What’s going on? Shouldn’t Norway and its currency be considered ‘quality’, having large surpluses on its fiscal balance and current account, high foreign currency reserves and little debt?

As a big energy exporter, Norway benefits handsomely from high energy prices, causing a big current account surplus and allowing Norway to run a fiscal surplus while most other countries are battling deficits. However, this energy money is not flowing into the Norwegian economy. Instead, it is saved in its sovereign wealth fund, which in turn invests abroad. Norges, its central bank, even buys large amounts of foreign currency to offset the high tax receipts from the energy sector. Therefore, the net impact of energy prices on the krone should be limited.

The lesson is: a currency is not the same as a credit and traditional credit analysis is not always helpful for currency views.

So why has the krone been weak? There has been a lot of focus on the foreign currency purchases of the central bank. These transactions, viewed in isolation, could potentially weaken the krone. And that seems to be how they are being interpreted. Also, despite Norges being the first developed market central bank to hike rates back in 2021, it has hiked the least overall, apart from the Bank of Japan. So perhaps investors believe the interest rate is too low to be enticing.

We still went long the Norwegian krone recently. The combination of quality and a low price was hard to resist. And with last week’s recent central bank meeting here was a potential trigger for change. Significant currency weakness makes the battle against inflation harder, and Norway has inflation running well above the central bank target.

So, what was the result of the meeting? Next to pre-committing to another rate hike next month, Norges even said that if the krone remains weaker than projected, a higher policy rate may be needed. Luckily the European Central Bank (ECB) played ball for this position as well, by not hiking big last week, as that would probably have put more pressure on the smaller currencies in Europe.

With this new position in the Norwegian krone, and our existing position in the Swedish krona, we can safely say we’re true fans of Scandinavia – but not at any price.