Norwegian krone will eventually strengthen

NOT even a strong fiscal position and exposure to the commodity story through being an oil exporter can discourage the bears from selling the Norwegian krone at the moment. Against the single currency, the Norwegian krone has weakened by 4.46 per cent since the start of September and 6.5 per cent since mid-May, erasing all the gains it made in the first five months of the year.
Last week’s announcement from the central bank will have done nothing to discourage the bears either. The Norges Bank kept interest rates on hold at 2 per cent and said that expected rate rises have been deferred. Its members see the krone as strong – it is currently trading at 8.1491 krone to the euro – suggesting that they see no reason to tighten for now, especially since it has the highest policy rate of its major Western European peers.

During the Norges Bank meeting, euro-krone traded close to the top of its range but the 8.18kr area seems to offer strong resistance for now, according to Saxo Bank’s John Hardy. Nonetheless, he adds that a break of this level could trigger a sizeable follow-up move higher for a time before the market finds value in the Norwegian krone again. Therefore, in spite of the recent weakening in the currency, there is still room for FX traders to short the krone at its current level.

BEARISH MOMENTUM

BNP Paribas’ FX analysts also expect the krone’s bearish momentum to continue and for the currency to remain under selling pressure: “The Norwegian krone has been on the back foot since the Norges Bank downgrade to inflation and implied rate forecasts. Euro-krone should trade in a higher 8.20kr-8.30kr range while dollar-krone has scope to move up to 6kr in the coming week.” They also think that the US Federal Open Market Committee decision – which is widely expected to announce a second round of quantitative easing – will weigh on the krone.

However, some currency analysts are more bullish about the prospects for the Norwegian krone. Societe Generale’s head of foreign exchange Kit Juckes argues that although a dovish Norges Bank spiked the wheels of the Norwegian krone, upbeat energy prices, rising PMIs and tightening labour conditions suggest that the sell-off will quickly reverse.

SocGen forecasts euro-krone to fall to 7.90kr by March and then to stabilise at 7.80kr until at least the end of next year. And despite BNP Paribas’ bearish outlook for the Norwegian krone, its forecast is for the krone to strengthen to 7.50kr by the end of next year and to 7.10kr by the fourth quarter of 2013.

FX traders should be waiting for the sentiment to change and then buy krone.