December 7, 2022

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Usually the crown weakens in war.  This time, the effect surprised economists

Usually the crown weakens in war. This time, the effect surprised economists

Russia’s military assault on Ukraine has sent shockwaves through Europe and the United States in recent days. The invasion also created moves in the financial markets.

Here at home, the Norwegian krone is weakening in the foreign exchange market, especially against the dollar. The weakness is still smaller than expected, according to economists.

At the same time, energy prices rose sharply. It can cause inflation to rise in the short run, and it will help reduce people’s purchasing power.

In the run-up to the Ukrainian crisis, it was particularly high inflation and the prospect of higher interest rates that created uncertainty in the markets. Interest rate and currency analyst Ingvild Borgen Gjerde at DNB Markets believes inflation will pick up in the short term, but currently sees no signs of significant changes in interest rate expectations.

Few people know what happens to inflation. But the effect of what is happening in Ukraine is higher inflation in the short term, no doubt about that, says Gerdi.

The krone drop is surprisingly weak

When markets are characterized by turmoil, especially geopolitical turmoil, investors tend to look for so-called “safe havens” to reduce risk. Historically, among other things, gold and the dollar were considered safe investments.

Gjerde explains that the NOK often weakens when the dollar rises.

The krone is a small currency, and in the market ‘little’ means ‘risky’, so it’s usually unattractive when risk appetite is as low as we saw yesterday, she says.

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On the other hand, the krone did not weaken as much as expected. The dollar is trading at around 8.9 kroner. Earlier in February, they had to pay about 8.7 kroner to the dollar.

Gerdi explains that it is higher oil prices that are preventing the krone from falling.

– The krone has suddenly weakened slightly, in fact there is nothing but the dollar. The reason for this, says Gerdi, is the high oil and gas prices.

In addition, Gerdi explains that higher oil and gas prices will have a more direct impact on the krone. When those prices go up, Norwegian oil and gas companies earn more money. Thus, they have to exchange more profits and buy NOK to pay the oil tax.

The price of oil recorded a strong jump on Thursday, as the price of a barrel exceeded 105 dollars at most. This is an increase of about seven percent over the previous day. It calmed down a bit on Friday and the price of oil fell back below $100 a barrel.

Believe in increasing interest rates

Lars Moland, credit and interest rate analyst at Nordea, does not think the war in Europe will change interest rate expectations immediately.

Credit and interest rate strategist at Nordea, Lars Moland.

Credit and interest rate strategist at Nordea, Lars Moland. (Photo: Peter Berntsen)

Moland has not made any changes to his interest rate forecast, and he still expects Norges Bank to raise rates once a quarter throughout the year.

– It is very tragic for Ukraine and will be difficult for Russia, but so far it does not seem that it will have significant real economic consequences outside Ukraine and Russia, he said.

In the United States, Moland thinks the picture looks a little different. The country is largely self-sufficient in energy and will not be affected to the same extent by rising energy prices. Additionally, US inflation has been much higher over the past year, leading the country into a wage-price spiral.

Gerdi also sees trends pointing to higher expectations for rate hikes in the US last week.

Market prices are now at almost 100 percent probability of eight increases over the next two years. Those expectations have risen since the beginning of the year, when it was priced at just over five in the same period, says Gerdi.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads 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.