Investing in Norway’s krone is becoming more hazardous as the central bank steers the currency and global trading desks lose their appetite for risk, according to DNB Markets head Ottar Ertzeid.
“The Norwegian krone is almost following the emerging markets currencies,” Ertzeid, who heads the investment banking and markets unit at DNB ASA, Norway’s largest bank, said yesterday in an interview in Oslo. “Norges Bank has contributed to this. The last year has been even less liquid than it used to be and some more liquidity could be helpful.”
The krone has plunged 10 percent against the euro since last year, following central bank steps to halt its gains. Policy makers were blindsided in 2009 as Europe’s debt crisis turned the krone into a haven for investors fleeing the euro. The central bank cut rates in 2011 and 2012. In June last year, it warned it won’t hesitate to ease policy again in an effort to bring inflation back to its 2.5 percent target.
Jon Nicolaisen, who took over as deputy governor at Norges Bank last week, said in an interview there’s no plan to change policy on the krone, and that he doesn’t view it as being significantly riskier than other currencies.
“The volatility of the Norwegian krone isn’t particularly scary when you compare it to Australia, New Zealand or Canada -- similar economies,” Nicolaisen said. “I don’t see a need to change that policy. If it ain’t broke, don’t fix it.”
The krone weakened 0.2 percent to 8.2264 per euro as of 12:40 p.m. in Oslo.
Ertzeid said the declining liquidity situation is unlikely to improve as banks cut risk and move away from proprietary trading.
The krone sees “big swings and big movements on fairly modest volume,” he said.
“We see some reduced risk capacity in some of the big banks that are particularly active in foreign exchange, it seems they are more and more moving onto electronic trading platforms,” Ertzeid said. “So the risk capacity in the market is lower on the back of this.”
The move to electronic trading comes as European Union officials propose a ban on proprietary trading to prevent too-big-to-fail banks from getting in trouble. The proposal, put forth in January, will target about 30 systemically important banks including Nordea Bank AB, the biggest in the Nordic region and Scandinavia’s only lender to figure on a G20 list of systemically important banks worldwide.