The Norwegian krone has come under sustained pressure across a basket of currencies this year, with NOK being the worst performing currency within the G10. Chiefly, this has been driven by the Norwegian Central Bank monetary tightening cycle finding itself on the back foot relative to its G10 peers, which has resulted in investors turning away from the krone as they seek higher yielding currencies. Compounding this has been the persistent fall in wholesale energy and commodity prices, as well as contractionary growth, explored below.
As mentioned, the primary driving force behind NOK’s underperformance has been the Norges Bank interest rate policy being notably more dovish than that of many other major central banks. Moving into January 2023 for example, rates in Oslo stood at 2.75% relative to the Federal Reserve’s 4.5% and the Bank of England’s 3.5%. With the Norwegian Central Bank holding this 2.75% rate up until late March, the krone’s interest rate differential continued to grow against other currencies, with the Fed and BoE respectively hiking rates 50 and 75bps over this period. As such, dovish sentiment continued to gain traction over H1 2023 as investors weighed up NOKs growing interest rate differentials.
Primarily, Norges Bank have had less pressure to raise rates given relatively soft and stable inflation. For example, over 2022 Norway’s inflation averaged 5.76% – a figure markedly lower that the EU, US and UK’s average of 9.2%, 8% and 7.92% respectively. Indeed, while the UK economy saw a peak inflation rate of 11.1% in October 2022, Norway’s highest level was just 7.5% (a figure which decelerated to 6.5% in the subsequent month of November).
Crucially, Norway have been subject to lower inflationary pressures given how their domestic energy market has reduced their exposure to soaring wholesale energy prices seen last year. Around 98% of Norway’s energy market comes from domestic renewable sources, enabling the economy to avoid the surge in energy prices endured by European counterparts. Meanwhile, with the UK importing about 37% of its energy, end-user electricity prices remain twice the European average. As such, while in the UK, the average proportion of a local annual salary being spent on electricity was 5% last year, in Norway it was as low as 1%. This came as the average annual electricity bill across households in Norway stood at €656.81 compared to €1,851.16 in the UK. Norwegian businesses too benefited from lower energy prices, which reduced input costs relative to its neighbours, relieving the need for suppliers to raise prices as high as elsewhere.
While Norway’s lack of exposure to the wholesale energy market reduced inflationary pressures, state support also eased the burden on households via subsidies which in turn alleviated consumer prices. For example, between January to March 2022, Oslo covered 80% of electricity costs when the market price for electricity was above 0.7 NOK per kilowatt-hour – equivalent to the UK intervening if UK electricity prices rose above seven pence per kilowatt-hour! Instead, the UK government implemented some subsides to UK households and businesses, consumer price pressures vis-à-vis energy were generally underpinned by rising price caps, a key driver of why CPI soared.
Given how relatively low energy prices across Norway have alleviated the need for the central bank to raise rates as high as their G20 counterparts, NOK has come under further pressure due to falling wholesale energy prices. Insofar as NOK is considered a petrocurrency, its value has a positive correlation with the cost of wholesale oil (and gas) prices. Accordingly, since the petroleum sector accounts for 26% of Norway’s GDP (and 54% of its total exports), falling wholesale oil prices have greatly diminished the value of its exports. This continues to weigh on the krone given that there is subsequently less demand for NOK.
The prospect of slower global demand, due to contractionary monetary and fiscal conditions along with easing concerns around global supplies continue to weigh on oil prices. Similarly, wholesale continental gas prices have also subsided from record highs seen last year as EU gas storage (presently at 72%), remains well above historic averages. As such, oil and gas futures pricing – respectively trading 35% and 75% lower than a year ago – has fed into Norway’s current account surplus in Q1 2023 narrowing to its lowest level since Q4 2021.
With falling energy prices adversely impacting the krone, stagnant growth has also been bearish towards the currency. For example, over Q1 2023, the economy expanded just 0.2% – marking a marginal uptick from Q4 2022’s 0% print. Moreover, with a tight housing market and rising mortgage payments causing a strain on families, household consumption contracted 5.1% on an annualised basis. Given that household consumption accounts for 41% of Norway’s GDP, the negative print raised investors’ fears over slow growth moving forward while fixed investments shrunk 10bps. Recent data also indicated that Norway’s GDP contracted 40bps between March and April, marking the lowest print in 14 months and the third monthly fall in the last four.
With growth concerns increasing, investors downwardly revised their rate hike expectations from Norwegian Central Bank.
However, on 22 June, Norges Bank surprised markets by delivering a 50bps hike to bring their benchmark rate to 3.75%. Given that markets had been pricing in a 25bps hike, the krone advanced higher against a volume weighted basket of currencies. While the BoE similarly raised rates by 50bps (to bring the base rate to 5%), GBPNOK retreated as much as 180bps over the session as investors weighed on the prospect of a UK recession. Chiefly, these recessionary fears had been driven by markets evaluating the prospect of tighter monetary conditions lasting for longer-than-expected – with money markets upwardly revising the BoE’s projected terminal rate to 6% (by Q1 2024).
Nevertheless, while the krone advanced on Norwegian Central Bank’s 50bps hike, the index ultimately finished the session only marginally higher as falling oil prices gave balance to the economic arguments of higher interest yield versus lower trade surplus.
All eyes now remain on the Norges Bank’s monetary cycle, particularly as the market considers how other central banks may be within reach of their respective terminal rates.
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