With much of the recent focus in the currency world centered around the weak US Dollar, the strong Euro, and their implications for global market place, many investors are overlooking other currencies, including the Norwegian Krone. The Norwegian Krone, which was introduced when Norway joined the short-lived Scandinavian Monetary Union in 1875, is currently trading at multi-decade highs against the US Dollar (but what isn’t these days?). In its recent bout of strength the Krone also reached its highest level against the Euro in well over four years during the early part of October. With the seemingly endless rise in the Euro over the past few months becoming more and more of a hot topic, the possibility of central bank intervention on the Euro seems to be growing. The Eur/Nok cross, which is at a key level, deserves some consideration as the turn of events in the coming weeks and months is likely to spark some significant momentum.
Now, lets go back to the beginning of 2003. In mid-January of 2003 the Eur/Nok was at its lowest level since the Euro’s inception in 1999. On January 22 Norges Bank cut both the overnight rate and the deposit rate by 50 basis points each, bringing rates down to 6.00% and 8.00% respectively. The January rate cut began the Krone’s one-year decline against the Euro. Throughout the one-year period further Norges Bank interest rate cuts lent upside momentum to the Euro. Norges bank cut interest rates 8 more times following the January rate cut, finally ending the loosening of its monetary policy in March of 2004 with its key interest rate at 1.75%. During the bank’s loosening cycle the Eur/Nok reached its highest level since the Euro’s inception at around 8.9015, which remains the all time high in the Eur/Nok.
After Norwegian rates stabilized at 1.75% in 2003, where they stayed until mid-2005, the Euro began to lose ground against the Krone. Oil prices are the main factor here. Oil prices, which were in the high $20/barrel range in March of 2003, rose to the $70/barrel range by mid-2005. According to the EIA, Norway was the tenth largest oil producing, and the third largest oil exporting country in world in 2006. As history has shown, oil price trends tend to impact the appreciation and depreciation of the Krone. Interesting side note, Norway’s oil profit based sovereign wealth fund, known was the Government Pension Fund of Norway, is the second largest in the world according to Pension Fund Online’s June 2007 valuation, second only to the UAE. Rising oil prices guided the Krone’s appreciation against the Euro, where is peaked around 7.69 in November of 2005, its highest level since early March of 2003.
It was in December of 2005 that the ECB commenced its rate tightening cycle, which took the Eur/Nok off of its 32-month lows against the Krone. Although Norges bank had already commenced its rate tightening cycle before the ECB, the Norges Bank’s monetary policy decisions didn’t hold much weight against the ECB’s policy decisions. The Eur/Nok quickly rose to around 8.50, where it peaked at its highest level since early August of 2004. It was around the late October/early November period where the Eur/Nok peaked that a three-month decline in oil prices began to show signs of bottoming out. Coupled with a renewed rise in oil prices in the beginning of 2007, a few surprise rate hikes in Norway sparked momentum in the Krone again. The Krone peaked around 7.62 in October of 2007, at its highest level since March of 2003.
The Eur/Nok is currently in the middle of its 15-year monthly trading range, and, as previously mentioned, on October 9, 2007 fell to 7.6178, its lowest level since early March of 2003. The Eur/Nok has since rebounded off of its early October low, but still remains below its 200-day moving average. Drawing a an acceleration line from the early 2007 Eur/Nok high and following the trend down to October lows, 7.6 stands out as a key level. The pair failed to maintain its downside momentum below the acceleration line, and, since rebounding, seems to have gained sustainable upside momentum. If the pair is able to maintain it’s upside momentum it is likely to climb past its early 2007 highs of 8.50.
With a relatively benign inflation outlook, it does not look like Noeges Bank will have to raise interest rates from their current level of 5.00%. Inflation remains a problem in the Euro-Zone, as indicated by ECB members in their recent rhetoric, and seen in the October inflation figures (most recently the y/y reading in the Euro-Zone was above the key 2.0% level). The ECB has indicated that, if the general marketplace was not clouded by the uncertainty that has resulted from sub-prime woes, they would have already taken action on interest rates. For the time being the ECB is likely to remain on hold until the future of the financial market place becomes more certain. In the event that the ECB raises interest rates, the Eur/Nok will gain further upside momentum, however, higher rates will lead the Euro higher in general, which may become a catalyst for central bank intervention on the Euro. Central bank intervention on the Euro will reverse the recent upside momentum on the Eur/Nok. If the Eur/Nok can manage a weekly close below the 7.6 handle downside momentum is likely to bring the cross below the 6.0 handle.
Finally, while oil prices do tend to impact the Nok exchange rate, other factors do tend to overpower the relationship. The future of crude oil prices is somewhat uncertain. In the long-term prices are likely to rise, which supports Krone appreciation, however, after failing to break $100 oil prices seem to have lost their recent upside drive.
Bottom line: With no Norges Bank interest rates on the horizon, as inflation is below its 2.5% target, the Eur/Nok is likely to take the elevator up to, and beyond 8.50. An ECB rate hike will add further upside momentum, while higher oil prices will only hinder the rate at which the Krone depreciates. If there is central bank intervention on the Euro, and the Eur/Nok can manage a weekly close below the 7.60 handle, the cross is likely to take the elevator down to and beyond 6.00.
By: John J. Phillips IV
Now, lets go back to the beginning of 2003. In mid-January of 2003 the Eur/Nok was at its lowest level since the Euro’s inception in 1999. On January 22 Norges Bank cut both the overnight rate and the deposit rate by 50 basis points each, bringing rates down to 6.00% and 8.00% respectively. The January rate cut began the Krone’s one-year decline against the Euro. Throughout the one-year period further Norges Bank interest rate cuts lent upside momentum to the Euro. Norges bank cut interest rates 8 more times following the January rate cut, finally ending the loosening of its monetary policy in March of 2004 with its key interest rate at 1.75%. During the bank’s loosening cycle the Eur/Nok reached its highest level since the Euro’s inception at around 8.9015, which remains the all time high in the Eur/Nok.
After Norwegian rates stabilized at 1.75% in 2003, where they stayed until mid-2005, the Euro began to lose ground against the Krone. Oil prices are the main factor here. Oil prices, which were in the high $20/barrel range in March of 2003, rose to the $70/barrel range by mid-2005. According to the EIA, Norway was the tenth largest oil producing, and the third largest oil exporting country in world in 2006. As history has shown, oil price trends tend to impact the appreciation and depreciation of the Krone. Interesting side note, Norway’s oil profit based sovereign wealth fund, known was the Government Pension Fund of Norway, is the second largest in the world according to Pension Fund Online’s June 2007 valuation, second only to the UAE. Rising oil prices guided the Krone’s appreciation against the Euro, where is peaked around 7.69 in November of 2005, its highest level since early March of 2003.
It was in December of 2005 that the ECB commenced its rate tightening cycle, which took the Eur/Nok off of its 32-month lows against the Krone. Although Norges bank had already commenced its rate tightening cycle before the ECB, the Norges Bank’s monetary policy decisions didn’t hold much weight against the ECB’s policy decisions. The Eur/Nok quickly rose to around 8.50, where it peaked at its highest level since early August of 2004. It was around the late October/early November period where the Eur/Nok peaked that a three-month decline in oil prices began to show signs of bottoming out. Coupled with a renewed rise in oil prices in the beginning of 2007, a few surprise rate hikes in Norway sparked momentum in the Krone again. The Krone peaked around 7.62 in October of 2007, at its highest level since March of 2003.
The Eur/Nok is currently in the middle of its 15-year monthly trading range, and, as previously mentioned, on October 9, 2007 fell to 7.6178, its lowest level since early March of 2003. The Eur/Nok has since rebounded off of its early October low, but still remains below its 200-day moving average. Drawing a an acceleration line from the early 2007 Eur/Nok high and following the trend down to October lows, 7.6 stands out as a key level. The pair failed to maintain its downside momentum below the acceleration line, and, since rebounding, seems to have gained sustainable upside momentum. If the pair is able to maintain it’s upside momentum it is likely to climb past its early 2007 highs of 8.50.
With a relatively benign inflation outlook, it does not look like Noeges Bank will have to raise interest rates from their current level of 5.00%. Inflation remains a problem in the Euro-Zone, as indicated by ECB members in their recent rhetoric, and seen in the October inflation figures (most recently the y/y reading in the Euro-Zone was above the key 2.0% level). The ECB has indicated that, if the general marketplace was not clouded by the uncertainty that has resulted from sub-prime woes, they would have already taken action on interest rates. For the time being the ECB is likely to remain on hold until the future of the financial market place becomes more certain. In the event that the ECB raises interest rates, the Eur/Nok will gain further upside momentum, however, higher rates will lead the Euro higher in general, which may become a catalyst for central bank intervention on the Euro. Central bank intervention on the Euro will reverse the recent upside momentum on the Eur/Nok. If the Eur/Nok can manage a weekly close below the 7.6 handle downside momentum is likely to bring the cross below the 6.0 handle.
Finally, while oil prices do tend to impact the Nok exchange rate, other factors do tend to overpower the relationship. The future of crude oil prices is somewhat uncertain. In the long-term prices are likely to rise, which supports Krone appreciation, however, after failing to break $100 oil prices seem to have lost their recent upside drive.
Bottom line: With no Norges Bank interest rates on the horizon, as inflation is below its 2.5% target, the Eur/Nok is likely to take the elevator up to, and beyond 8.50. An ECB rate hike will add further upside momentum, while higher oil prices will only hinder the rate at which the Krone depreciates. If there is central bank intervention on the Euro, and the Eur/Nok can manage a weekly close below the 7.60 handle, the cross is likely to take the elevator down to and beyond 6.00.
By: John J. Phillips IV