Below you can see how much the euro has appreciated (hit chart) since the krone started weakening last fall. The cost of one euro in the foreign exchange market is NOK 11.44 on Thursday at 1pm. With fees and poor exchange rates, you have to pay up to NOK 12. The krone has never been this weak since the end of April 2020.
Over time, a weaker krone means more expensive cell phones, computers, cars, and everything else we rely on to buy from abroad. There are several reasons for the weakness of the krone, the most important of which are:
- Interest rates have risen more abroad than they have risen at home.
- The price of gas has fallen sharply.
- Major currencies are favored by investors in bad times.
- The krone weakens when US stock markets fall.
– There are many factors that lead to a weak crown. The krone is no longer a high-interest currency, quite the opposite, but it has been a long time since the krone was a low-interest currency, says a currency strategist.
In fact, interest rates should rise more abroad than they do here at home, if the market is right. Even traditional low-interest currencies such as the Japanese yen and the Swiss franc expected higher interest rates than the Norwegian krone within two years.
Good news for anyone with a loan
It is associated with a slightly different interest rate policy. Ostenor says Norwegian households are more sensitive to interest rates.
– One of the consequences of a weak krone is that it increases the growth of prices here at home more, but it also increases the prices of what we import. These prices are raised because they often contain imported parts, currency strategist Magne Østnor at DNB Markets tells Nettavisen.
Because of the krone, European holidays have become 10 percent more expensive since last summer. A family vacation that cost NOK 50,000 last year now costs NOK 55,000. Plus, come price hikes, which make vacation plans more affordable.
The weak corona does its part to discourage the desire to travel. The positive thing, Ostenor says, is that it strengthens the competitiveness of export firms.
The collapse of the krone: an economist warns the Norwegians
Obviously, expectations are lower
Next Thursday there is a very important interest rate meeting at the Bank of Norway: how much will the key rate increase and what signals is the central bank sending? The market is still convinced of an increase of 0.25 percentage point to 3 percent within a week, but no longer believes in 3.75 percent with the peak interest rate this year. This is good news for borrowers.
– The market now expects a one-and-a-half rate increase through August, Ostenor says. In other words, there will be a rate hike through Thursday, but only a 50 percent chance of a similar increase in the next five months.
– The market is greatly affected by what is currently happening in the banking sector. I think the Bank of Norway will raise interest rates by 0.25 percentage point in a week. Then they will point out that the headline numbers indicate a higher interest rate, but wait and see if the banking sector has dire consequences for the economy.
Then there will be a freeze in interest rates
Ostenor says that if what happens to banks has an impact on future production and employment, interest rates will not be higher. So-called systemically important banks can fail.
The Bank of Norway officially makes its decision on Wednesday, the same day the US central bank makes its announcement. But it is too late to influence the outcome here at home. The BNO’s VIP “cut-off” is usually the Friday before. This means that this time Norges Bank is confirming the key figures through March 17th.
Another important factor in the devaluation of the krone is the greatly reduced gas price, which has greatly reduced exports and foreign exchange earnings for Norway. Much of this income is converted into kroner.
– Gas prices have fallen a lot since the beginning of the fourth quarter of last year by 85 percent, but they came from extreme levels. We still have to go back several years to see current levels, Ostenor says.
Financial disaster: warns Norwegians with holiday plans
More important than we think
He says the gas price has always been “undeservedly insignificant” to the Norwegian economy and thus foreign exchange earnings. But gas constitutes half of the volumes of what we can export of oil and gas abroad.
– Export values are now higher for gas than for oil, but from day to day the price of oil is still the most important relative to the krone exchange rate, Ostenor says.
There is no immediate clarity of the krone, the turmoil in the markets is bound to subside.
If you do not have this interest rate, you must contact the bank
Don’t get out of the woods
– Right now, we’re not out of the woods. The krone does not feel well with the market turmoil, and although it has not weakened in the past week, the turmoil is generally negative for the krone, Ostenor says.
Has the appetite for Norwegian krone diminished in the market?
– Yes, the fourth obvious factor is the one that weakens the krone. Recently, we have seen a more or less parallel development in a number of currencies against which the krone is compared, namely to other commodity currencies and the Swedish krona.
– The ratio is not one to one, but there was a drop in risky coins. It fits nicely with the picture that interest rates have skyrocketed as a result of higher inflation, and that also drives down stock prices.
Close connection with the stock index
Both DNB Markets and Nordea Markets are concerned that there is a close relationship between how the krone develops and how things are doing in the US stock markets. The S&P 500 is the benchmark here. If it drops too low, it weakens the krone.
– The krone is one of the currencies most closely associated with risk sentiment in the S&P 500. There are several reasons for this. Norway has a small, open economy, which is also because there is usually a positive relationship between the oil price and the stock market, Ostenor says.
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