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Nordic Parity Odds Soar as Central Bankers Diverge: Currencies

Norwegian one thousand krone currency notes. Photographer: Kristian Helgesen/Bloomberg
Norwegian one thousand krone currency notes. Photographer: Kristian Helgesen/Bloomberg

Norway’s krone has about an even chance of falling to parity with the Swedish krona in the next two years as monetary policies in the bordering nations diverge.

There’s a 49 percent probability the krone will weaken to the 1 per Swedish krona level last seen in 2000, up from 11 percent odds at the start of the year, according to data compiled by Bloomberg. Deutsche Bank AG, the largest currency trader, and Sweden’s SEB AB both say the krone may depreciate more than 7 percent to match its peer.

In a month when companies from French retailer Carrefour SA to Dutch chemicals producer Akzo Nobel NV blamed the euro’s strength for denting profits, Norwegian exporters can take comfort from the new prime minister saying she’s willing to weaken the currency to boost trade. Sweden’s Riksbank, which like the Norges Bank meets tomorrow, has said it won’t use interest rates to influence its currency.

“Sweden’s had a central bank that hasn’t felt it’s been an issue to have a currency that’s relatively strong,” Carl Hammer, a currency strategist at SEB in Stockholm, said in an Oct. 14 phone interview. “What Norway cares about the most is to keep their competitiveness. Because Norway has become so expensive, there’s a risk that the krone versus Sweden’s krona may fall to 1.05 or even parity.”

Parity Reached

The Norwegian krone has slumped 7.8 percent this year to 1.0773 Swedish kronor at 2:36 p.m. in New York. It slid to a 9 1/2-year low of 1.0578 on Oct. 2. Norway’s currency last fell to parity in June 2000, and before 1982 had always stayed below that level, according to data compiled by Bloomberg dating back to 1971.

Norges Bank has kept its main interest rate at 1.5 percent since March 2012, and will do so again tomorrow, according to 15 of 16 economists surveyed by Bloomberg. The dissenting voice predicted a quarter percentage-point reduction to 1.25 percent, matching the record-low in place from June to September 2009.

Norwegian Prime Minister Erna Solberg, who took office last week, said in September she’ll work to weaken the krone to boost competitiveness as cost pressures weigh on the economy of western Europe’s largest oil producer.

Paying Off

The krone has dropped 5.5 percent against its Swedish counterpart since Norges Bank Governor Oeystein Olsen said in a Feb. 14 interview that if Norway’s currency “gets too strong over time, leading to inflation that’s too low, we will act.”

Norway’s consumer-price inflation accelerated to 2.5 percent in August, reaching the central bank’s target for the first time in four years. The annual rate slowed to 1.7 percent last month, the government said Oct. 10.

Sweden has taken a different approach to interest rates. The krona’s rate is one of many items policy makers consider when setting borrowing costs, and policy rates shouldn’t be used to influence the currency, Riksbank Deputy Governor Cecilia Skingsley said in a Sept. 19 interview in Stockholm.

Swedish policy makers will tomorrow leave their benchmark rate at the 1 percent they’ve maintained since December, according to all 17 economists surveyed by Bloomberg. The repurchase rate was as low as 0.25 percent until June 2010.

Slow Inflation

Even with Norway’s and Sweden’s diverging pronouncements on policy, swaps prices show their central banks will probably raise borrowing costs by similar amounts over the next year.

Both Norges Bank and Riksbank will boost rates by about 20 basis points, or 0.2 percentage point, according to Credit Suisse Group AG indexes. That may reduce the chances of Norway’s krone depreciating relative to its Swedish peer.

Sweden’s inflation rate was below-target for a 21st month in September, rising an annualized 0.1 percent, official data showed Oct. 10, while industrial production slumped 2.3 percent in the previous month. The Riksbank has struggled to spur growth while reaching its 2 percent inflation target without fueling household debt.

The krone-krona rate is “close to bottoming out,” Valentin Marinov, head of Group of 10 currency strategy in London at Citigroup Inc., the second-largest foreign-exchange trader, said in an Oct. 21 phone interview.

“Investors might be too optimistic on the Riksbank, the Swedish economy, and from that point of view we’d argue that the scope for dovish surprises may be greater from the Riksbank than the Norges Bank,” he said.

‘Fair Value’

Marinov estimates “fair value” for Norway’s krone is 1.1 Swedish kronor. A more dovish tone from the Riksbank tomorrow may push it up toward 1.14, he said.

Norges Bank said last month that it will start raising rates from mid-2014, while Riksbank officials said they’ll start lifting borrowing costs late next year. That should favor the Norwegian krone rather than Sweden’s krona.

“Parity can never be ruled out but it would take another big shift in relative interest-rate expectations in favor of the Swedish krona,” Daragh Maher, a currency strategist at HSBC Holdings Plc in London, said in an Oct. 14 interview. “If anything, Norway’s krone now looks a little oversold relative to recent shifts in rates.”

Amsterdam-based Akzo Nobel, the maker of Dulux paint, said Oct. 21 that a strong euro had hurt its earnings when reporting third-quarter profit of 456 million euros ($627 million). Chief Financial Officer Keith Nichols said in a conference call that a year-on-year decline in revenue was “primarily driven by the unfavorable currency effects, as the euro strengthened.”

Rising Euro

Carrefour, France’s largest retailer, said the euro’s gains versus the Brazilian real and Argentine peso damped Latin American sales when reporting Oct. 17 third-quarter revenue that fell 1.3 percent to 21.1 billion euros.

The 17-nation common currency has risen 4.5 percent against the dollar this year, and is the best performer after the Israeli shekel and Danish krone among 31 major currencies tracked by Bloomberg.

Sweden’s krona is the seventh best-performer, rising 2.1 percent versus the dollar, with Norway’s krone dropping 5.9 percent, data compiled by Bloomberg show. While the krona has gained 3.9 percent this year against a basket of nine developed-market peers, Norway’s currency is down 5.1 percent, Bloomberg Correlation-Weighted Indexes show.

“The problem in Norway simply is that the price level is relatively high, and that puts incredible pressure, primarily on the export sector,” Henrik Gullberg, a currency strategist at Deutsche Bank in London, said yesterday. That’s “one of the reasons why Norges Bank still puts a lot of emphasis on exchange-rate movements when they set the interest rate, which is not the case for the Riksbank to the same extent.”

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