Norway’s Krone Drops to Five-Year Low on Oil Slump, Norges Bank

The Norwegian krone fell to a five-year low against the euro as traders awaited forecasts from the central bank on how much declining crude prices would harm Western Europe’s biggest oil and gas exporter.

The krone weakened against all but one of its 16 major counterparts and three-month implied volatility on the euro-krone currency pair climbed to the highest since October 2013. Norway faces “dark clouds” as it struggles to prevent plunging oil prices from disrupting the economy, central bank Governor Oeystein Olsen said last month. That day Brent crude was at $78.10 a barrel. Today it dropped below $65 a barrel for the first time since 2009.

“The market is very nervous,” said Camilla Viland, a currency strategist at Oslo-based DNB ASA. “The key question everyone is asking is how does Norges Bank view the development in the oil price, and how big an effect do they see from this on the Norwegian economy? Pricing in the options market suggests that whatever the outcome is, we will see a large reaction in the krone.”

The Norwegian currency slid 1.1 percent to 8.9127 against the euro at 5:15 p.m. in Oslo. It touched 8.9382, the weakest level since July 2009. The currency has lost 6.4 percent against the euro and 15 percent against the dollar this year, the worst performance among major currencies tracked by Bloomberg.

Implied volatility, a gauge of market expectations for futures price swings, rose for a sixth day, climbing to 9.30 percent. Traders were paying the highest premium in more than a year for options that protect against a weaker krone versus the euro, relative to those that protect against gains.

Norges Bank will keep its benchmark interest rate unchanged at 1.5 percent in a decision scheduled to be announced tomorrow at 10 a.m. local time, according to the median estimate of economists surveyed by Bloomberg News. Yet traders see an almost 50 percent chance of rate cut, forward rate agreements show.

The Organization of Petroleum Exporting Countries today cut the forecast for how much crude oil it will need to provide in 2015 to the lowest in 12 years amid surging U.S. shale supplies and reduced estimates for global consumption.

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