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Until the beginning of last month, the Norwegian krone had mounted an impressive rally against the euro (EUR/NOK), climbing nearly 10% since December 2021, as the country's central bank became an early fighter against inflation with three 25 basis point rate hikes already under its belt.
While Norges Bank remains ahead of its rivals on interest rates – having raised its main rate from 0% to 0.75% since September 2021 – it has recently reined in its previous hawkish rhetoric.
Euro on the uptrend
This came just as the European Central Bank became more hawkish on inflation at its early April meeting – with more members calling for an end to its quantitative easing programme to pave the way for rate increases in the summer. Since then, the euro has been in the ascendency, regaining nearly half of its losses.
The euro fell as low as NOK9.43 on 4 April, but a month later it stands at NOK9.89, having hit a two-month high of NOK9.99 just three trading sessions ago.
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Euro-Norwegian krone (EUR/NOK) price chart
Meanwhile, the krone is unlikely to gain much support from the central bank at Thursday's policy meeting. It is widely expected to remain on hold and say little.
Marc Chandler, chief market strategist at Bannockburn Global Forex, said: “The krone has been no match for the dollar, but it has appreciated against most of its major trading partners this year.”
He added: “The recent weakness is unlikely to be sufficient to spur Norges Bank into faster action. After hiking last September, December, and March this year, it will likely wait for the June meeting to hike again.”
Interest rate on hold
Jane Foley, FX strategist at Rabobank, suggests Norges Bank will stick to around four 25 basis point hikes in total by the end of the year, as concerns grow over the impact of higher rates on indebted households.
“This means that rates are likely to remain on hold this week,” Foley added. “It also means that the Norges bank has transitioned from being one of the most hawkish in the G10 into a much more ‘middling’ position as other central banks have stepped up their hawkishness.”
Such a view accounts for the euro’s recent strength, but many analysts – including Foley – expect more to come from the krone.
Analysts at Bank of America wrote in a note to clients last week: “We remain bullish on NOK on our expectation of higher oil prices and a less aggressively priced Norges Bank relative to other central banks, particularly in Europe.”
Indeed, the krone is attractively linked to high oil and gas prices: Norway is Europe’s second biggest oil producer and the world’s 11th largest, though it is a minnow when compared to Russia – producing only around a fifth of the 10 million barrels a day that Russia pumps, per 2021 data from the US Energy Information Administration.
But petroleum products account for around half of Norway’s export revenues, and with energy crisis-hit European countries seeking alternatives to their reliance on Russian oil and gas, the krone should see further support.
Foley concludes: “Given expectations that energy prices will remain firm, we would expect NOK buyers to step in at current levels.”
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