The krone is weakening and money market interest rates are falling after Norges Bank sold the krone in the market for the first time since 2013. – Changing the system, says analyst.
Norges Bank will sell 2 billion NOK per day in April, According to a message from the Central Bank.
The exchange takes place in order to be able to transfer foreign currencies to the Petroleum Fund.
For several years, Norges Bank has purchased kroner (an exchange currency) on behalf of the central government, so that oil revenues in foreign currency from the central government’s budget can be used.
Purchases have been halted since February, after rising oil and gas prices increased oil tax revenues, and anti-Corona measures were gradually scrapped.
The last time Norges Bank sold krona was in October 2013, but sales weren’t as big as they are now.
In advance, both SEB and DNB Markets had expected Norges Bank to start krone sales in April. SEB forecast had a cautious start with sales of NOK 500 million per day in April, while DNB Markets forecast NOK 1.5 billion.
As a result of the Corona crisis, the central bank increased its kroner purchases to a new record of 2.5 billion Norwegian kroner per day in July 2020, in order to transfer funds to the government and cover the sharply increased use of oil money.
weaken the crown
The krone transactions at Norges Bank have little effect on the krone exchange rate over time, as it is balanced, among other things, by oil company exchanges to pay the oil tax. But in the short term, major changes can strengthen the crohn’s movements.
The krone has strengthened about four per cent against the euro and 2 per cent against the dollar so far this year.
But as soon as the krone sale is published, the krona weakens by 9-10 euros against both the euro and the dollar. Thus, the euro is now worth 9.70 kroner and 8.72 kroner to the dollar.
– Change the system
Danske Bank Kristoffer Lomholt currency analyst describes the transformation as a change of system.
Norges was expected to turn around one day, but their choice to do so at once is surprising, he says.
Lumholt points out that the sum of the two billion was less than his calculations of 1.5 billion.
The market might have expected the turnaround to take place step by step, not that it would reach $2 billion, he says.
In addition to the devaluation of the krone, there is a marked decrease in short-term interest rates in the Norwegian money market.
– What the market reacts to is that he has suddenly acquired an important direct seller of krona in the market. It is a regime change in the money market.
– Satisfaction in the market
Lumholt points out that in two years there was tight liquidity in the money market, that is, there was less cash flow between banks. This has raised interest rates and made it more expensive for banks to finance their loans.
– What is happening now is that Norges Bank is starting to pump 2 billion billion again into the market, and this will make it cheaper for the banks to finance themselves.
The drop in interest rates we saw today at about ten basis points (0.10 percentage point) is a big deal. The market is relieved to suddenly have better access to the NOK.
In isolation, Lumholt says, it means Norges can move faster on raising its key rate, but there are other things that are more important at the moment.
Banks have also refrained from raising interest rates as much as money market interest rates have gone up, so there is also no reason to lower interest rates on mortgages, he believes.
Expect 2 billion the rest of the year
Danske Bank analysts believe purchases will now remain at least $2 billion for the rest of the year (excluding mid-December).
Norges Bank tries to facilitate currency purchases throughout the year to have as little impact on the market as possible, so I expect them to continue at this pace.
However, he maintained that what is important here are the future prices of oil, gas and currency, which are currently very uncertain prices.
– There is no “game-changer” for the krone, although in isolation it is negative in relation to the exchange rate, he continues.
Lumholt believes that more people can see the current weakness as a buying opportunity, also because many see Norwegian investments as a good inflation buffer, due to the oil and gas business.
“The window for a stronger crown is now closed,” Nordea Markets wrote in an analysis. The brokerage is also open for krone sales to be larger after the revised budget in May.
Nordea forecasts the krone weakening to 9.75 against the euro in three months and 10.00 by the end of the year.
Changes interest rate expectations
Currency strategist Magne Østnor at DNB Markets said today’s krone news is changing the picture for both currency outlook and interest rates.
He says that the recent strengthening of the krone is largely due to the fact that Norges Bank did not sell krona and bought the currency, but it is now starting to change.
– Because with higher oil and gas prices, revenues will be much higher, says Ostnor.
Ostenor points out that oil companies exchange currency for krona when they have to pay taxes, i.e. they buy kroner. With oil and gas prices skyrocketing, tax payments, and thus the purchase of the krone, will also be high.
Now revenues are so great that they cover more than the state budget deficit. This means that the profits must be transferred to the Petroleum Fund. But then Norges Bank must first exchange the krone for the currency, that is, sell the krone.
– We were waiting for this corrective factor to be what the krone sales would be, says Ostenor.
– Now we only have one factor for a very long time. He contributed to the strengthening of the krone. Now flip it over, he says.
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