Krone Volatility Soars After Norges Bank Bungles Guidance

Analysts and economists tracking the Norwegian central bank say a period of unclear guidance from policy makers has exacerbated a surge in krone volatility as liquidity dries up.

“A lot of people have had a hard time interpreting Norges Bank in the past year,” Magne Oestnor, a currency strategist at DNB ASA, Norway’s biggest bank, said in an interview. “Many have speculated in a stronger krone and taken losses after fast and sharp movements in the past months.”

Since the beginning of June, Norway’s krone has seen the biggest surge in one-week implied volatility versus the euro of the major currencies tracked by Bloomberg. The period includes a sudden krone selloff after Norges Bank cut its main rate to 1 percent on June 18 and surprised markets by signaling more may follow. The news sent the krone down 2 percent against the euro on the day.

Norway’s krone can drop “brutally fast” because it trades in such a small market, Oestnor said. “It’s hard to get prices -- and get good prices -- even if you have stops, you’re not guaranteed a trade.”

Krone volatility has spiked as markets grow more focused on liquidity. These days, investors are more interested in deep markets than they are in stellar credit ratings. With the Federal Reserve preparing to raise U.S. interest rates, investors want to know they can sell in a hurry if debt and currency markets turn volatile.

The krone rose as much as 0.8 percent on Thursday and was trading at 8.7484 against the euro as of 12:46 p.m. in Oslo. It’s still the biggest loser over the past year of the 10 currencies tracked in the Bloomberg Correlation Weighted Index.

Don’t Panic

According to Norges Bank Governor Oeystein Olsen, the broad market “correction” in risk premia going on now is no grounds for panic. Instead, we’re just witnessing an adjustment of risk-reward assumptions after a period of ultra-low interest rates, he says.

For investors trading kroner, that means accepting that “there are always some fluctuations,” Olsen said in a Tuesday interview in Hammerfest near the northernmost tip of mainland Norway. And while the exit can be very be narrow, the governor says “so far we’re not very worried about” liquidity.

Olsen indicated last week he’s happy with the sudden drop in the krone, which will help exporters in western Europe’s biggest oil producer withstand lower crude prices.

But the bank is earning itself a reputation for delivering currency shocks, which is starting to shape investor bets.

“The reaction to last week’s Norges Bank decision tells it all,” said Ole Haakon Eek-Nielsen, an analyst at Nordea Bank AB. Though there’s considerable anxiety around the timing of the Fed’s first interest-rate increase, “fear of Norges Bank” cutting rates “is more important,” he said.

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