Norway’s currency has been the strongest performer in Bloomberg’s Correlation Weighted Currency Indexes over the past month, gaining 3.1 percent against nine developed-nation counterparts. Japan’s currency has been the biggest loser, falling 5.1 percent.
“While we have been positive on the Norwegian economy and the krone for some time, its gains look increasingly stretched,” RBS analysts led by Paul Robson, currency strategist in London, wrote in a client note. “Recent yen weakness against European currencies looks overdone and is not justified by moves in interest rates.”
Japan’s currency gained 2.4 percent against the krone to 14.17 yen at 11:12 a.m. in New York. The yen has depreciated against Norway’s currency for four consecutive weeks.
Robson recommended that investors take a short position against the krone at 14.46 yen, targeting a move down to 13.85 and a stop order at a two-day close above 14.8 yen in case the krone gains. A short position is a bet that an asset will decline in value.
Norges Bank Governor Oeystein Olsen said Feb. 27 in a speech in Moss, Norway, that said foreign-exchange rates are an important input when setting interest rates since they influence the pace of inflation and employment. The central bank will not “intervene systematically” in currency markets, he said, as its main tool is the interest rate.
“Norges Bank has a strong tendency to be very sensitive to how strong their exchange rate is,” Melinda Burgess, a currency strategist at the firm in London, said in a telephone interview. “We see there might be more interest-rate cuts than are currently priced in by the market.”
The central bank in December lowered its main lending rate by half a percentage point, its biggest cut since May 2009, to its current level of 1.75 percent. RBS forecasts a decrease of 25 basis points, or 0.25 percentage point, in the central bank’s interest rate each quarter for the rest of the year, according to Burgess. The 75 basis point reduction would bring the benchmark rate down to one percent by year’s end.
The consensus view in a Bloomberg survey of 15 economists, not including RBS, is for the rate to remain at 1.75 percent at year’s end.
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