The Norwegian krone rate level will be “very important” ahead of Norges Bank’s interest rate meeting in December, the strategist says.
The krone fell significantly during the day on Tuesday, with one dollar trading for 11.22 Norwegian kroner, while one euro reached 11.98 Norwegian kroner, according to figures from data resource Infront.
Except for its peak at the end of May, the euro has not been more expensive over the past 12 months.
For the dollar, the picture is roughly the same. The peak in May and the end of October is what separates the currency from being at its highest levels against the krone in a year.
It’s important for many Norwegians, and not just because a potential holiday abroad will be more expensive than before. The krone exchange rate is also key when the Bank of Norway assesses the level of future interest rates, according to currency strategists.
He fears the weakness of the krone
The krone exchange rate also affects the price level here at home, because a weak krone in isolation makes imported goods more expensive.
– I think the krone could remain at a weak level today, and perhaps even weaker, Olaf Chen, head of global personalization and attention at Storebrand, told E24 on Sunday.
It is feared that a weak Norwegian krone will help keep price inflation and interest rates high in the future.
– I am very concerned about the krone exchange rate, because it has a direct impact on inflation after six to nine months. See everything around you. The car I’m sitting in, the phone we’re talking on, the headset, the coffee I’m holding in my hand is here. Everything is purchased from abroad, Chen said.
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Higher, but at a lower level
Handelsbanken has a slightly different analysis. But this also does not mean that debt-ridden Norwegians can immediately sip champagne.
– Our forecasts point to a slightly stronger krone at the end of the year and into 2025, says interest rate expert and currency strategist Nils K. Knudsen in Handelsbanken to E24.
It is believed that two things can be concluded from these predictions, if they turn out to be correct:
1. For imported inflation, the currency will shift from pushing price growth to the other direction.
2. Handelsbanken’s endpoint for the krone exchange rate, of 11 kroner to the euro at the end of 2025, is weaker than many imagined only a short time ago.
– We don’t really believe that we will return to our previous levels.
Therefore, the trend of a gradually weakening krone remains, according to Knudsen.
– This is because we think that the Norwegian krone is a bit weak in today’s exchange rate picture, he says.
Higher inflation, higher uncertainty
Especially in the last decade, it has been observed that currency and exchange rates are highly unpredictable.
– They move around a lot. It is a very strong contributor to the shock to the Norwegian economy. Especially in a situation where we’ve had very high inflation,” Knudsen says.
With a completely different level of price growth than before, uncertainty has also increased when Norges Bank has to make trade-offs, explains the Handelsbanken strategist.
The reason for this is that central banks rely entirely on trust. You manage things according to inflation, but also according to production and employment. Especially when you are far from your target, it is extremely important that you announce that you are returning, and that the markets believe that you are.
Lost a little bit of impact
Basically, it’s more beneficial to put money somewhere where you get more in return because of higher interest rates. Therefore, the level of interest rates and expectations in a country affect exchange rates.
Since the end of June, the Bank of Norway has had a higher interest rate than the European Central Bank (ESB). But except for a strengthening over the summer, the krone exchange rate has since fallen to lower levels.
– Why did the krone exchange rate not strengthen further, despite the rise in interest rates from Norges Bank?
– After the interest rate meeting in June, we saw the krone strengthening during July and a bit of August, partly on the basis that Norges Bank took on more and was more forward-looking. Knudsen says the same thing happened after the meeting in September.
But after last week’s interest rate meeting, the mood has changed somewhat, according to the currency strategist. Then the central bank announced that peak interest rates may have been reached.
– So we can say that we received a slight repricing of expectations for future Norwegian interest rates, which may have contributed to the fact that we lost a little bit of the influence that Norges Bank provided to the market in June and September.
– It can lead to significant fluctuations
Knudsen believes the krone exchange rate will be “very important” in whether interest rates are raised or not in December.
– It’s a very centralized volume now. October inflation figures, due on Friday, could cause very significant fluctuations. Both in terms of expectations about what Norges Bank will do in December, but also in terms of the krone exchange rate, he says.
Going forward, a series of figures will provide Norges Bank with important information in the run-up to the December interest rate meeting. Currency strategist points out November inflation figures, how the krone exchange rate is evolving, the report from the Norges Bank regional network and what’s happening Real economyReal economyEconomic activity that relates to the production and consumption of goods and services (which is not related to the financial sector).
– This means that it is completely open whether there will be a rate hike in December. It will likely fluctuate somewhat in the future depending on what comes next.
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An earlier version of this quoted chief strategist Dane Cekov at Nordea Markets. However, these rates were provided by interest rate and currency analyst Nils K. Knudsen in Handelsbanken. The matter was resolved on 07.11.2023 at 20.45.
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