ANALYSIS-Global growth gloom may be behind Norwegian crown's "mystery" weakness


By Elizabeth Howcroft

LONDON, Oct 24 (Reuters) - Norway's crown should be sailing high, thanks to a central bank that's raising interest rates, a robust economy and a recovery in the price of its main export. Instead, it's this year's second worst major currency performer.

Economists are for the most part unable to pinpoint domestic reasons for the crown's weakness -- it has fallen 3% against the euro this year alone -- and some fret the trend is a reflection of worrying signs for the global economy.

Although the Norges Bank held rates at 1.5% on Thursday without flagging a further tightening of policy in the near term, it has been an outlier among global central banks in having raised rates three times in the past year.

The crown's scant gains to a one-week high versus the euro after the policy meeting barely register against its 40% fall since mid-2012. It hit its lowest ever level last Friday at 10.245 EURNOK=D3.

And that despite the crown being backed by a much higher interest rate than the main euro zone rate of minus 0.5%.

The last time the currency of the wealthy Scandinavian oil-exporter was even close to its current level was during the global financial crisis in 2008-2009.

And this time too, the root of the weakness may lie in deepening uncertainty about the world economy and investors' reluctance to hold assets in small, open economies such as Norway's which are highly exposed to global trade and economic growth.

"All smaller trade-linked currencies have suffered. Domestic factors have been secondary," said Erica Dalsto, chief strategist for Norway at SEB, who sees the crown possibly hitting 10.30 by year-end.

She pointed to weakness in the neighbouring Swedish crown and the increasing correlation since early-2017 between the two currencies.

Dalsto said the Norwegian crown's poor performance suggested there was a lot of uncertainty among international investors spooked by U.S.-China trade ructions, Brexit wrangling and tensions in the Middle East.

The Norges Bank appears to concur, noting in its September policy report that the crown had weakened markedly at the beginning of August when trade tensions between China and the U.S. deepened.

Dalsto's colleague Richard Falkenhall, a senior FX strategist at SEB, suggested the weakness could be down to big investors steering clear because of the risk of a global liquidity seize-up in event of a market crisis.

That would make the crown and other smaller currencies like it highly vulnerable to a sharp fall.


Others are less sure why the crown is performing so poorly.

Analysts were expecting that last year's crown slide, possibly due to the fall in the price of oil, would ease off in 2019. But while crude prices have risen 14% since January, the crown has continued to skid lower.

UBS Asset Management's head of currency strategy Jonathan Davies described the weakness as a "mystery".

"This is not the first time that Scandinavian currencies have sold off to levels that appear highly undervalued without obvious explanations," he said.

Davies noted the Norwegian crown was also cheap in the aftermath of the 2008 financial crisis but said none of the explanations given for the weakness at that time were "wholly convincing".

Niels Christensen, chief analyst at Nordea, agreed.

"It's a puzzle when you look at the macro-economics because they're not as terrible as the currency is telling you," he said.


Christensen said nervousness on international markets may not fully explain the crown's performance because it is weak even against the currency of Sweden, another country highly correlated to the ebb and flow of global trade.

The Norwegian crown fell this week to its lowest against the Swedish crown since January NOKSEK=D3.

"It is a puzzle that it is the NOK that is the weakest of the two – if anything you find the weak data in Sweden, not Norway," Christensen said.

BMO Capital Markets' European head of FX strategy, Stephen Gallo, was the one analyst who attributed the crown's weakness to Norway's economic fundamentals, citing a trade deficit, decreased industrial output and an "astronomical" run-up in private sector debt.

"These issues could be enough to cause foreign investors to have second thoughts about buying NOK assets," Gallo said.

The central bank, however, does not seem too concerned. It said on Thursday crown weakness may result in higher inflation, which is currently running below its 2.5% target. What's more, the weak currency is a boon for the export-driven economy.

And foreign ownership of Norwegian shares at 38.9% at the end of September is the highest since 2007, according to data from the Oslo Stock Exchange, which is up more than 10% this year .OBX.

"For the central bank, as long as it's not a dramatic fall, it's a win-win," Nordea's Christensen said.

Norwegian, Swedish crown increasingly correlated vs. euro

G10 + Norwegian crown

The Lonely Hiker

(Additional reporting by Tommy Wilkes in London and Terje Solsvick in Oslo; Graphics by Ritvik Carvalho; Editing by Sujata Rao and Kirsten Donovan)


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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