What needs to happen for the Norwegian krone to strengthen
The Norwegian krone has been weak against major international currencies for some time now. The Local spoke to financial experts to find out whether the currency can expect a recovery anytime soon.
The Norwegian krone has been singled out as the weakest among the world's ten most traded and used currencies, by a Bloomberg foreign exchange index.
On Tuesday, one dollar cost 10.66 Norwegian krone, while a euro was trading for 11.61 krone and 13.52 krone was required to buy a pound.
As things now stand, most financial analysts in Norway agree that there is no upswing for the krone on the horizon. But what needs to happen for the krone to recover and increase in value?
The road to a stronger krone
Dane Cekov, a currency strategist at Nordea, told The Local that at least two things need to occur for the krone to bounce back.
"The Norwegian krone will likely remain under pressure in the time ahead. For it to strengthen, energy prices would need to rise, and Norway would need to have higher interest rates compared to other developed economies," Cekov said.
Both of these factors should have considerable effects on the krone.
On the one hand, when Norway's key policy interest rate is lower than that in the Eurozone or the United States, that makes it less attractive to investors, as higher interest rates provide the potential for greater returns on investments denominated in the currency.
On the other, energy prices affect the Norwegian krone as the sale of oil and gas make up a large part of the country's economy.
Unfortunately, at the time of writing, no concrete movements were unfolding in the markets that could lead to the krone's value bouncing up again in the short term.
Headwinds ahead
Norwegian financial analysts mostly agree that there is limited room for optimism when it comes to the krone recovering anytime soon.
However, according to Nils Kristian Knudsen, a currency strategist at Handelsbanken in Norway, some normalisation may take place in the medium to long term.
"We expect the coming period to probably involve headwinds for the krone in terms of global central banks fighting inflation – it still seems like central bank (Norges Bank) rates are posed to increase a bit further, but also the market is probably moving closer toward normalisation in that respect.
"There is a sort of movement of the focus to what will happen next year, and that involves some normalising and cutting interest rates again – we think that will add some tailwind for the krone.
"However, we need to be patient, as we haven't seen this unfolding in the market yet, there are short-term headwinds, but eventually, when we see inflation coming back down again, the krone will have room to recover," Knudsen told The Local on Monday.
Has the central bank done enough?
Professor Ola Honningdal Grytten at the Norwegian School of Economics (NHH) recently told forskning.no that some economists believe that Norges Bank should have raised interest rates sooner – and to a great extent.
In any case, according to Grytten, the central bank's primary focus hasn't been on keeping the value of the krone stable in the past year.
If Norges Bank had been more focused on the krone, it would have probably raised the interest rate more.
But such an approach would also have its costs, as it would have led to more expensive mortgages and even tighter finances for most ordinary consumers in Norway.
A less vulnerable krone
At the same time, Knudsen at Hadelsbanken pointed out that the central bank's (Norges Bank) current strategy of fighting inflation did contribute to a less vulnerable krone.
READ MORE: Is Norway's plan to keep prices down working?
"Norwegian interest rates have increased, and relative to Norway's main trading partners, as of lately, this also contributed to making the Norwegian krone less vulnerable," Knudsen said, explaining that a strengthening of the krone hasn't taken place but that the currency is less vulnerable compared to recent times.
For example, just last winter, the krone was very vulnerable from a perspective that interest rates couldn't go so much up relative to Norway's other trading partners, according to the strategist.
"That narrative has changed a bit now; the market sees that we can handle higher interest rates, based on current domestic activity," Knudsen said.
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The Norwegian krone has been singled out as the weakest among the world's ten most traded and used currencies, by a Bloomberg foreign exchange index.
On Tuesday, one dollar cost 10.66 Norwegian krone, while a euro was trading for 11.61 krone and 13.52 krone was required to buy a pound.
As things now stand, most financial analysts in Norway agree that there is no upswing for the krone on the horizon. But what needs to happen for the krone to recover and increase in value?
The road to a stronger krone
Dane Cekov, a currency strategist at Nordea, told The Local that at least two things need to occur for the krone to bounce back.
"The Norwegian krone will likely remain under pressure in the time ahead. For it to strengthen, energy prices would need to rise, and Norway would need to have higher interest rates compared to other developed economies," Cekov said.
Both of these factors should have considerable effects on the krone.
On the one hand, when Norway's key policy interest rate is lower than that in the Eurozone or the United States, that makes it less attractive to investors, as higher interest rates provide the potential for greater returns on investments denominated in the currency.
On the other, energy prices affect the Norwegian krone as the sale of oil and gas make up a large part of the country's economy.
Unfortunately, at the time of writing, no concrete movements were unfolding in the markets that could lead to the krone's value bouncing up again in the short term.
Headwinds ahead
Norwegian financial analysts mostly agree that there is limited room for optimism when it comes to the krone recovering anytime soon.
However, according to Nils Kristian Knudsen, a currency strategist at Handelsbanken in Norway, some normalisation may take place in the medium to long term.
"We expect the coming period to probably involve headwinds for the krone in terms of global central banks fighting inflation – it still seems like central bank (Norges Bank) rates are posed to increase a bit further, but also the market is probably moving closer toward normalisation in that respect.
"There is a sort of movement of the focus to what will happen next year, and that involves some normalising and cutting interest rates again – we think that will add some tailwind for the krone.
"However, we need to be patient, as we haven't seen this unfolding in the market yet, there are short-term headwinds, but eventually, when we see inflation coming back down again, the krone will have room to recover," Knudsen told The Local on Monday.
Has the central bank done enough?
Professor Ola Honningdal Grytten at the Norwegian School of Economics (NHH) recently told forskning.no that some economists believe that Norges Bank should have raised interest rates sooner – and to a great extent.
In any case, according to Grytten, the central bank's primary focus hasn't been on keeping the value of the krone stable in the past year.
If Norges Bank had been more focused on the krone, it would have probably raised the interest rate more.
But such an approach would also have its costs, as it would have led to more expensive mortgages and even tighter finances for most ordinary consumers in Norway.
A less vulnerable krone
At the same time, Knudsen at Hadelsbanken pointed out that the central bank's (Norges Bank) current strategy of fighting inflation did contribute to a less vulnerable krone.
READ MORE: Is Norway's plan to keep prices down working?
"Norwegian interest rates have increased, and relative to Norway's main trading partners, as of lately, this also contributed to making the Norwegian krone less vulnerable," Knudsen said, explaining that a strengthening of the krone hasn't taken place but that the currency is less vulnerable compared to recent times.
For example, just last winter, the krone was very vulnerable from a perspective that interest rates couldn't go so much up relative to Norway's other trading partners, according to the strategist.
"That narrative has changed a bit now; the market sees that we can handle higher interest rates, based on current domestic activity," Knudsen said.
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