'US inflation is a risk': What's next for Norway's weak krone?
Norway's krone, while still weak, may be showing signs of stabilising after a year of volatile fluctuation. However, several external factors threaten to rock the boat, a leading expert has told The Local.
Despite a bump in the key interest rate from Norges Bank towards the end of 2023 and its short-term strengthening effect on the krone exchange rate, recent data from leading financial data provider Infront tells a clear story - the uptick was short lived.
The euro, which traded at 11.23 kroner at the close of 2023, increased to 11.41 kroner by Monday evening, while the US dollar strengthened from 10.17 to 10.52 kroner within the same period.
READ MORE: Will the weak Norwegian krone recover in 2024?
Is this the new normal for the krone, and should consumers in Norway expect the exchange rate to stabilise at this level in the short-to-mid term? And what are the key factors that could lead to an unexpected shift and break from the status quo?
Stability on the horizon for 2024 – unless 'something crazy happens'
The Norwegian krone appears to have found a stable footing against the euro and the US dollar in 2024. Yet, the calm might not last if external disruption, mostly in the US, materialises, currency strategist Dane Cekov at Nordea told The Local.
"For now, it would seem that the krone exchange rate against the euro and US dollar appears to be stabilising. Still, a lot can happen this year… Since the New Year, it has been pretty much stable, from 11.2 kroner against the euro to trading for roughly 11.4 in the last few months," Cekov said.
"So yes, I think, if nothing crazy happens this year, it should trade around here for a while. But overall, we expect it to end up closer to 11 than 12 kroner against the euro at the end of the year," Cekov said.
The analyst further pointed out that the outcome will depend on factors such as inflation abroad, interest rate cuts by the US central bank, commonly called the FED) and the European Central Bank (ECB), and stock market movements.
The key risks to the krone exchange rate this year
When asked to single out the two key risks that could lead to the krone further weakening this year, Cekov pointed to inflation in the United States and the falling expectation of interest rate cuts by the FED.
"The main risk factor here is inflation in the US. At the beginning of the year, the market factored in about six to seven interest rate cuts in the US, and there were more people expecting rate cuts in March. But now, there's an expectation of a potential first rate cut in June, with the market estimating around four cuts in total," Cekov said.
READ MORE: Weak krone, soaring prices: Is Norway still an attractive country for foreign workers?
That would not favour the krone exchange rate against the dollar and would further weaken it. On the flip side, the krone exchange rate would get a boost from faster interest rate cuts overseas.
Nordea's currency analyst also emphasised the importance of 2024 being an election year in the United States.
"We have an election year, but that is more likely to deliver an effect in 2025," he said, adding that oil prices falling due to an OPEC-related price war is also one of the several risks Nordea is monitoring.
How these factors affect the krone
Simply put, to combat high inflation in the US, the Federal Reserve may opt to increase interest rates or hold the rates at a higher level for a longer time period.
When interest rates are high or rise, holding assets denominated in that currency becomes more attractive as investors can earn higher returns on their investments.
Consequently, there is an increased demand for the dollar as investors seek to capitalise on higher interest rates.
Furthermore, if the FED implements fewer interest rate cuts than initially expected, that could suggest that the US economy might be performing relatively well.
This could bolster confidence in the dollar and further attract investors seeking higher yields. As a result, there is a potential for capital inflows into the US, strengthening the dollar relative to other currencies, including the Norwegian krone.
Therefore, the combination of high inflation in the US and fewer interest rate cuts by the FED could create a scenario where the dollar strengthens against the krone as investors favour dollar-denominated assets over those denominated in kroner, thereby weakening the krone exchange rate against the dollar.
This effect can be replicated by other countries, and typically, higher interest rates in Norway than in other countries have contributed to a strong krone historically.
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Despite a bump in the key interest rate from Norges Bank towards the end of 2023 and its short-term strengthening effect on the krone exchange rate, recent data from leading financial data provider Infront tells a clear story - the uptick was short lived.
The euro, which traded at 11.23 kroner at the close of 2023, increased to 11.41 kroner by Monday evening, while the US dollar strengthened from 10.17 to 10.52 kroner within the same period.
READ MORE: Will the weak Norwegian krone recover in 2024?
Is this the new normal for the krone, and should consumers in Norway expect the exchange rate to stabilise at this level in the short-to-mid term? And what are the key factors that could lead to an unexpected shift and break from the status quo?
Stability on the horizon for 2024 – unless 'something crazy happens'
The Norwegian krone appears to have found a stable footing against the euro and the US dollar in 2024. Yet, the calm might not last if external disruption, mostly in the US, materialises, currency strategist Dane Cekov at Nordea told The Local.
"For now, it would seem that the krone exchange rate against the euro and US dollar appears to be stabilising. Still, a lot can happen this year… Since the New Year, it has been pretty much stable, from 11.2 kroner against the euro to trading for roughly 11.4 in the last few months," Cekov said.
"So yes, I think, if nothing crazy happens this year, it should trade around here for a while. But overall, we expect it to end up closer to 11 than 12 kroner against the euro at the end of the year," Cekov said.
The analyst further pointed out that the outcome will depend on factors such as inflation abroad, interest rate cuts by the US central bank, commonly called the FED) and the European Central Bank (ECB), and stock market movements.
The key risks to the krone exchange rate this year
When asked to single out the two key risks that could lead to the krone further weakening this year, Cekov pointed to inflation in the United States and the falling expectation of interest rate cuts by the FED.
"The main risk factor here is inflation in the US. At the beginning of the year, the market factored in about six to seven interest rate cuts in the US, and there were more people expecting rate cuts in March. But now, there's an expectation of a potential first rate cut in June, with the market estimating around four cuts in total," Cekov said.
READ MORE: Weak krone, soaring prices: Is Norway still an attractive country for foreign workers?
That would not favour the krone exchange rate against the dollar and would further weaken it. On the flip side, the krone exchange rate would get a boost from faster interest rate cuts overseas.
Nordea's currency analyst also emphasised the importance of 2024 being an election year in the United States.
"We have an election year, but that is more likely to deliver an effect in 2025," he said, adding that oil prices falling due to an OPEC-related price war is also one of the several risks Nordea is monitoring.
How these factors affect the krone
Simply put, to combat high inflation in the US, the Federal Reserve may opt to increase interest rates or hold the rates at a higher level for a longer time period.
When interest rates are high or rise, holding assets denominated in that currency becomes more attractive as investors can earn higher returns on their investments.
Consequently, there is an increased demand for the dollar as investors seek to capitalise on higher interest rates.
Furthermore, if the FED implements fewer interest rate cuts than initially expected, that could suggest that the US economy might be performing relatively well.
This could bolster confidence in the dollar and further attract investors seeking higher yields. As a result, there is a potential for capital inflows into the US, strengthening the dollar relative to other currencies, including the Norwegian krone.
Therefore, the combination of high inflation in the US and fewer interest rate cuts by the FED could create a scenario where the dollar strengthens against the krone as investors favour dollar-denominated assets over those denominated in kroner, thereby weakening the krone exchange rate against the dollar.
This effect can be replicated by other countries, and typically, higher interest rates in Norway than in other countries have contributed to a strong krone historically.
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