Oil is king for Norway’s krone

 
Philip Salter
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EVER since the discovery, exploration and extraction of North Sea oil in the 1960s, Norway has been able to profit from the substance that keeps the wheels of the world’s economy turning.

Like Canada’s Loonie, Norway’s currency is highly correlated with oil’s ups and downs. As such, “the recent rise in oil on the back of Middle-Eastern unrest saw the krone at a three year low versus the dollar of 5.2171kr” explains Ian O’Sullivan of Spread Co. He adds: “Oil’s tumble from $115 to $98 also saw the krone tumble some 8 per cent.”

But excepting another global recession – not beyond the realms of possibility – demand for oil is unlikely to abate. Kathleen Brooks of Forex.com points to BP’s recently released Statistical Review of World Energy, which apart from confirming the rise of China, shows, perhaps surprisingly, that demand for oil grew dramatically in developed economies in 2010. Christopher Beauchamp of IG Index says the “Saudi decision to lift output may not be enough to hold prices back, especially now that $100 per barrel is seen as the ‘new normal’ by some Opec members.”

THREE CROSSES TO WATCH
Swiss & Global Asset Management’s investment strategy for June 2011 states that it favours the Norwegian krone. There are certainly some interesting crosses to watch. Beauchamp says the Nokkie weakened against the dollar in May on the expectation of the ending of quantitative easing in the US, but has gained once more on the expectation of continued loose policy in US. In May, Norway’s central bank raised rates by a quarter to 2.25 per cent. According to Beauchamp, provided oil demand stays strong, a continued weak dollar should see the Nokkie rise.

O’Sullivan thinks euro-Norwegian krone looks interesting at its current levels. He believes the Eurozone looks precariously balanced and oil looks cheap compared to recent levels. As such, he advises “any rally in euro-Norwegian krone towards 7.90kr-7.950kr should be sold with a target of 7.75kr-7.70kr.”

Brooks notes that over the last year, the Nokkie has done badly against the Swedish krona. This she suggests has been based on the expectation that interest rates will rise faster in Sweden than Norway. However , Brooks suggests that if we see an escalation in political instability in the Middle East, rising oil could see the Norwegian krone strengthen against the Swedish krona.