Norway’s central bank can probably sit out the global currency war that is now at its doorstep.
Even a potential intervention in neighboring Sweden is unlikely to boost the Norwegian krone as a deepening rout in Brent crude drags down the currency of western Europe’s biggest crude producer.
“At the end of the day, the Norwegian krone is oil- fixated,” said Daragh Maher, head of currency strategy for HSBC in New York. “Really, the issue is whether the oil price can find a bottom.”
Brent crude dropped to $32 a barrel this week and is down about 71 percent from a high in June 2014. That has driven the currency down more than 46 percent against the dollar over the same period and 16 percent against the euro.
The central bank has cut rates to a record low 0.75 percent and has signaled the possibility of more easing this year as it combats recessionary risks brought on by a slowing petroleum sector and lower oil prices.
The krone gained 0.6 percent to 9.6577 per euro as of 8:36 a.m. in Oslo, snapping a two-day slump.
Svenska Handelsbanken AB agrees with HSBC that the krone will remain strongly tied to oil prices, and adds that an intervention by the Riksbank would increase volatility in the Norwegian currency.
While it’s hard to pin-point the impact of an intervention by the Riksbank, DNB ASA sees at least a 1 percentage-point gain in Norway’s currency against the Swedish krona, according to Magne Oestnor, an analyst in Oslo.
“You could see a washout of speculative positions in the NOK-SEK, which is currently for a stronger Swedish krona,” said Magne Oestnor, an analyst at DNB. “Flipping those positions will obviously have the impact of a stronger Norwegian krone against a Swedish krona.”
Norway’s currency has dropped nearly 8 percent over the past year against the Swedish krona to levels not seen since 1992, when it began to float freely, even as the Riksbank seeks to weaken its currency to fight off the threat of deflation.
The Swedish bank has already resorted to negative rates and pushed through several rounds of quantitative easing. It said this week is ready to “instantly” intervene in currency markets if necessary. The economy has responded, expanding at an almost a 4 percent pace and driving krona demand.
“What we’ve seen is that the liquidity in the Norwegian and Swedish currencies have deteriorated more permanently than what we’ve seen in other currency pairs, especially after the Swiss franc shock last January,” Oestnor said.