Norway Krone May Lose ‘Juice’ on Libya, Deutsche Bank Says

A bundle of Norwegian Krone notes
A bundle of Norwegian Krone notes sit on display at a bank in Oslo, in this file photo. Photographer: Heidi Wideroe/Bloomberg

Norway’s central bank will probably have to shelve planned interest rate increases to counter a surge in the krone fueled by $100 oil as Libyan unrest disrupts supply, according to Deutsche Bank AG.

“We could easily see a postponement of a quarter” until the autumn, said Henrik Gullberg, a London-based strategist at the world’s biggest currency trader, yesterday by phone. “If they lower the rate path, I think that would take some of the juice out of the stronger appreciation trend in the krone.”

The krone yesterday climbed to a four-year high versus the euro and was the best performing major currency against the dollar, the euro and the yen last month as political unrest in the Middle East intensified. Norway, the world’s seventh-biggest oil exporter, can’t raise its production to ease price pressure, Prime Minister Jens Stoltenberg said in an interview yesterday. Nor has boosting supply “been an issue” in talks inside the International Energy Agency, he said.

That’s adding to pressure on the central bank to contain currency gains fueled by the surge in oil as exporters such as Norsk Hydro ASA, Europe’s third-largest aluminum producer, struggle to stay competitive.

Krone Weakening

The krone lost the most in a month against the euro was today the third-biggest loser of the 16 most-traded currencies tracked by Bloomberg against dollar and the euro. It was trading at 5.5681 versus the dollar at 2:47 p.m. in Oslo. Against the euro, the krone slipped 1 percent to 7.7663. It was also down 0.5 percent against Sweden’s krona.

Oslo-based Norges Bank, which last raised the overnight deposit rate in May bringing it to 2 percent, has signaled it will resume tightening by the middle of the year.

“If we see continued appreciation of the krone, then Norges Bank will probably lower its rate path at the next meeting” on March 16, Gullberg said. “A lower rate path would more or less offset higher oil prices. It would stop the appreciation of the krone.”

Clashes between Libyan rebels and forces loyal to Libyan leader Muammar Qaddafi have curbed oil exports, catapulting brent crude prices to a 2 1/2-year high this week. Riots have toppled leaders in Tunisia and Egypt. Protests have also spread to Yemen, which lies south of the world’s biggest crude exporter Saudi Arabia.

Bearish on Krone

The krone has appreciated 2 percent against the euro since a Feb. 11 low and is up 4.8 percent against the dollar in the same period. The currency yesterday hit a 17-month high against the dollar.

“The krone is far stronger than Norges Bank forecast,” Erik Bruce, senior economist at Nordea Bank AB in Oslo, said in a note to clients yesterday. “Unless the krone weakens before the meeting, a dovish central bank should disappoint the market enough to weaken the krone. Either way, the outlook for the krone is bearish.”

Norway’s Finance Minister, Sigbjoern Johnsen, said it’s a key policy concern to ensure the krone doesn’t appreciate to an extent that hurts exporters.

“Of course we are concerned about the competitiveness of Norwegian business,” Johnsen said in an interview in Oslo today. Norway needs a “very restrictive finance policy; this is our contribution to not putting extra pressure on the currency.”

Inflation Lid

Stoltenberg yesterday declined to comment on government efforts to rein in the currency’s surge following the recent jump in oil prices.

Krone gains have contributed to keeping inflation below the central bank’s 2.5 percent target since July 2009. Annual underlying inflation, which excludes energy costs and taxes, eased to 0.7 percent in January from 1 percent the previous month.

Norway’s central bank has shown greater commitment to using policy to cap krone gains than its Nordic neighbor the Stockholm-based Riksbank, where Governor Stefan Ingves said in November the currency is left to “its own devices.”

“Norges Bank is one of the central banks that typically is most influenced by the exchange rate,” Gullberg said.

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