Published: March 26th, 2021
The Norwegian krone (NOK) is on track for exceptional performance in 2021. That’s the consensus view expressed by analysts at Goldman Sachs, HSBC, and Oslo-based Nordea Markets this week. Senior market watchers are looking ahead to an expected interest rate hike this Summer by the Norges Bank and upgrading forecasts that were already looking bullish.
Despite some intraday losses at the start of the week that mirrored similar losses in commodities and equities, krone continued to hold its 2021 gains better than most other majors.
In a note to investors, FX and rates strategists at Nordea Markets said that with the recent Norges Bank policy meeting now concluded, krone is less likely to be susceptible to those kinds of short-term movements. Nordea’s current view for EUR/NOK has it falling below 10.00 by July.
That view is being propped up by statements from Norges Bank policymakers, who are becoming notably optimistic about Norway’s economic outlook. Oil-rich and services-focused Norway is one of the world's wealthiest countries, and its economic rebound in the aftermath of successive waves of COVID-19 has been impressive. All of this points to an interest rate rise by mid-to-late Summer.
If it happens, Norway will be the first major economy to raise its cash rate post-pandemic. The coronavirus has had a levelling effect in terms of global borrowing costs. An interest rate rise ahead of other economies could position krone at the major currency pack's head.
FX strategists at Goldman Sachs told Bloomberg that several ‘macro catalysts’ have started to align around NOK’s strong fundamentals. Central bankers at Norges Bank are heading in a different policy direction than the US Fed. They noted that the return of interest rate differentiation could drive the krone into outperform mode.
Potential barriers to a rate hike still need to be faced down. COVID-19 infection numbers keep on rising, alongside some of Europe’s strictest measures to contain it.
But as Norway’s health ministry forecasts that a sizeable proportion of adults could be vaccinated by Summer, attention is turning back to potential upside risks for Norge’s Bank’s inflation target. Inflation tipped above the central bank's two per cent target in January and went over three per cent in February.
Those sorts of uncertainties have analysts at Goldman Sachs on a more cautious footing, forecasting a fallback to 8.19 for USD/NOK over the next six months, followed by building momentum if the Norges Bank rate hike happens.
Goldman thinks that could push USD/NOK back to the 7.74 benchmark last seen in early 2018 over the next 12-months. That scenario would see krone hit its highest level since the oil price plunge that kicked-off in 2014.
Following last week’s Norges Bank meeting, HSBC’s FX research unit told investors that Norwegian economic performance is expected to be robust in 2021. The country has started the year on a firmer footing than many countries, they noted, after seeing less GDP contraction than most western countries.
Against that backdrop, the central bank can put the financial scaffolding in place for further interest rate rises this year. HSBC thinks policymakers have the flexibility to act without fear of stifling economic growth since commercial activity will likely be above pre-pandemic levels by December.
‘If anything, economic outlook risks are skewed to the upside,’ they said. ‘That could give Norges Bank freedom to act even faster.’
Rising interest rates would strengthen a case for outperformance by any currency. But in the current market, commodity-backed fiats like krone are likely to find additional support from rising prices for raw materials and energy. They are all expected to advance further in 2021, even as central bankers in other economies are forced to keep cash rates zero or under.
If it raises interest rates this year, Norges Bank will have fired the starting gun on a period that will see it diverge from other central bank policy rates and outlooks. That’s sure to get the attention of forex traders.
HSBC believes that rate hike speculation and rising economic output will fuel a stronger NOK in the coming months. As other Nordic central banks like the Riksbank keep to a dovish path, krone’s positives probably aren’t being priced-in fully by currency markets. USD/NOK, for example, has been at the upper bound of its fair value range, placing it even higher than that USD/SEK. Analysts think that’s odd, especially if you look at how Norway beats Sweden, not least in its faster pace of monetary policy normalisation.
NOK/SEK is only one example of policy divergence, as Sweden’s central bankers grapple with downside risks to the inflation target. That almost certainly ensures that they keep to a dovish policy stance on rates even as Norway positions for rate rises. And there are other pairs where NOK is expected to dominate.
Shortly after the coronavirus outbreak began last year, exchange rates have been driven almost entirely by pandemic-related movements in equity and commodity prices. With vaccination rollouts underway and rosy economic overcasts starting to bloom, that’s all set to change.
Norway’s situation could be the beginning of a return to differentiation between central banks. A key indicator will be bond yields, which will play a huge role in the coming months. This factor is already impacting markets elsewhere and shaking up rankings for major currencies. If Norges Bank raises the incentives for exceptional krone gains, the benefits of divergence are likely tipped in Norway’s favour.
Senior analysts at Capital Economics said that Norway’s central bankers have a well-earned reputation for doing precisely what they say they'll do. 'Unlike some central banks where you have to read the tea leaves to understand real intentions'. That all points to Norwegian policymakers boosting interest rates sooner than later.