December 7, 2022

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The chief analyst recommends sales of the krone: - Winter is coming

The chief analyst recommends sales of the krone: – Winter is coming

The Norwegian krone has fallen significantly against the US dollar over the past year. Despite the fact that the Norges Bank has tightened monetary policy while increasing interest rates, the dollar has gone from costing about nine kroner in August to more than ten kronor now in October.

Christopher Lumholt, chief analyst at Danske Bank, expects a further depreciation of the Norwegian krone in the coming months, and therefore recommends his professional clients to get rid of the krone.

Winter is coming for the Norwegian krone, the analyst writes in a recent report.

For individuals who invest foreign assets, for example in US stocks, the weakness of the krone will be positive in the short term.

strong dollar

Lumholt cites the global investment environment as the number one cause of the krona’s weakness:

– The Norwegian krone is known to be sensitive to the extremes in the global investment environment, emerging as one of the weaker currencies in times of low economic growth and tighter monetary policy, says Lumholt, noting that recent data points to further interest rate hikes and tightening by the US central bank, which is often referred to as the “Federal Reserve”.

Dane Cekov, chief strategist at Nordea Markets, also notes this in a report. He also believes that the dollar will continue to rise broadly in the coming months, thanks to the central bank raising interest rates at a high pace and the economy so far showing few signs of weakness.

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Our view is that the dollar’s ​​rise will not stop until the US central bank succeeds in reducing inflation, so that it can abandon monetary policy, or we see a clear improvement in the outlook for the global economy, the strategist writes.

Nordea analyst Dane Cekov believes the dollar's strength will continue.

Nordea analyst Dane Cekov believes the dollar’s strength will continue. (Photo: Nordea)

The second thing that Lumholt highlights is the pace of interest rate hikes by the Norges Bank, which were relatively early in the rate hike. So, we are already beginning to see the effects of the high rate of politics in Norway, Lumholt writes.

Norges Bank also indicated a more gradual pace of interest rate hikes going forward, with an increase of 0.25 basis points each time. According to the analysis, the fact that interest rate hikes in Norway will be more moderate than in the US will contribute to the continued strengthening of the dollar.

This is because global capital will be directed towards markets with higher interest rates.

Krone sales soar

According to Lumholt, the extremely high oil and gas prices, which have generated significant income for Norge AS, are also creating kinks in the machines.

In August, it became known that the Norwegian bank will buy foreign currency on behalf of the corresponding country for each 3.5 billion NOK per day in September. This means that the central bank is selling NOK.

The reason for the record decrease in the krone is the state income from oil and gas companies, which, on behalf of the Ministry of Finance, must be converted into dollars or euros before being deposited in the oil fund or used on the state budget.

The higher sales of the krone will help push the krone exchange rate down.

– In addition, we see a risk that Norges Bank will have to increase its sales for November and December, Lumholt writes.

I recommend betting that the krone will drop

In the short term, Lumholt also sees activity and moves in oil and gas prices pointing to a three per cent weakening of the krone. Finally, he points out that the Norwegian krone, by virtue of being a small currency, is particularly prone to year-end liquidity problems.

– In summary, we therefore see a positive in risk taking a short position against the NOK, Lumholt concludes.

However, if Norges Bank adopts a more “tight” stance, global market risk appetite rises or the Fed reverses its tight monetary policy, it could strengthen the krone. (Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links that lead directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.