In recent days, the krone strengthened against the euro from around 10.20 to 9.84 (see chart below). The krone has not been very strong since the beginning of November last year.
– This mainly concerns oil and gas prices. It paints a picture of Norway that stands out once again in a positive sense.
The Swedish krona is weakening, as is the euro. Eurozone rate hike expectations are falling, DNB Markets currency strategist Magny Ostenor tells Nettavisen.
In isolation, low interest rates and interest rate expectations are bad news for the currency. Investing money in currency will not be attractive anymore.
But the acute situation in the gas market is good for the Norwegian economy and the krone. We get a very high income growth that helps to strengthen the krona, because the increased income from the currency must be converted into krona.
A fan favorite
– As long as gas demand continues, the krone remains one of the clear and expected winners. Ostnor says some speculators use the krone to hedge the foreign exchange market, which is a speculative hedge.
The decline in the stock market has increased internationally, It is usually not good for the crown. But Ostnor says the value of the kroner of foreign investment remains at about the same level. Then the managers do not need the investors to do anything with their wallets, such as exchanging krona.
On the other hand, the dollar is a haven in turbulent times. Consequently, the dollar has strengthened against the euro, with one euro now trading below $1.10 versus $1.14 a short while ago.
You have no reserves
Senior Strategist Erica Dalstow at SEB says that The foreign exchange reserves of the Russian Central Bank in dollars are not available. Then the demand for dollars increases and US interest rates rise.
– But we’re in a special situation now. The krone usually performs very poorly when the risks in the markets are high. But when energy prices rise as sharply as they do, it is commodity currencies that developed the strongest.
– If the war in Ukraine escalates further, we can get a much larger correction. Dalstow says the war will have more negative consequences for Europe than for the US, and the European Central Bank will proceed more cautiously in raising interest rates.
Key interest rate in the air
Simultaneously with the strengthening of the krone, the important 3-month money market interest rate has risen in recent days. The signal interest rate is now 1.27 percent (see chart below). This interest rate is very important for variable mortgage rates-Loans vary according to market interest rates.
We must go back to March 2020 to find a similar high. It is now clear that the difference between the 3-month interest rate and the Norges Bank prime rate (0.50 per cent) is higher than it was before.
This indicates that the market believes in an increase in interest rates in the future, og The first 0.25 percentage point is likely to come on March 24th. According to Ostenor, the rise in interest rates in Iceland is mainly due to the rise in the corresponding short-term US interest rates, that is, loans with short maturities.
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– We have imported a higher risk premium from the dollar, and the dollar price in the money market is increasing. This is partly due to the fact that the supply of deposits in Russian dollars has deteriorated, and partly because some banks, and perhaps especially European banks, have lower profits.
– Their operations in Russia are affected, and some banks have securities in Russian banks. The strategist says there is an increased possibility that they will incur a loss here, and thus pay slightly higher interest rates in the money market.
Ostnor says there will also be weaker liquidity in the Norwegian money market going forward. This raises interest rates.
Many increases in progress
DNB Markets expects four rate hikes this year and two in the next six months, with the key policy rate hitting 2 percent by the summer of 2023.
SEB also believes in four increases this year, but is satisfied with the rate hike from Norges Bank next year. Then the key interest rate stops at 1.75 percent
– Yes, we have 1.75 percent as the maximum interest rate, and 1.75 to 2 percent another normal level, and as our electricity prices go up, the effect of increasing interest rates will have a stronger impact on households.
– Since they have more debt, fewer interest rate increases are needed to relieve pressure on the Norwegian economy, and thus also inflation, says Dalstow,
Huge wage settlement
But she admits that the Norwegian labor market is very narrow. It’s time for a massive wage settlement this year, as there are almost no resources available in the Norwegian economy.
– It puts pressure on inflation, but then we turn to the question of what is the natural rate of interest: how much do we need to raise the interest rate to bring down inflation? asks the strategist.
NHO’s chief economist Oystein Durum believes that the key policy rate May rise as much as 2.50 percent in 2024. It is the highest among the major forecasters, and the main reason for Durum is the tight job market.
If Durum was right, the typical interest rate on a mortgage would be 4 percent. Today, according to statistics Norway, the average interest rate is Just over 2 percent.
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