NOK weakness before the Corona crisis lock down

Pre Corona, many of us had a hard time understanding why the NOK weakened to the EUR with a triple AAA country rating, increasing positive interest rate differential to the EUR and higher economic growth. However, it did.
Sure, the inflation has been higher, so based on the Purchasing Power Parity (PPP), you would, all other alike, expect the «higher inflation currency» to fall relatively. Read more about how this can partially explain the NOK weakness, but not all, here.

The long-term performance of an investment in NOK, is also much better than what the spot NOKEUR chart would indicate. Read more about the long term performance of a long NOK position here.

Several analysts looked into this, digging for other plausible explanations to understand. They started to wonder if it was linked to the uncertain sustainable transition of the Norwegian economy away from oil and gas. Their conclusion was clear, it was not, as the net purchase of Norwegian assets by international investors was positive. Read more about the oil and gas dependency of Norway and to what extent Norway can do the sustainable transformation here.

I am quite confident that Norway can contribute in meeting the inevitable short term demand of energy requiring fossil fuel (as not enough alternative energy) to the world and at the same time make the transition to a sustainable «after oil and gas era» economy.

NOK weakness after the Corona crisis lock down

Post Corona, the NOK has seen substantial weakening to the EUR. Not a surprise that smaller floating currencies get a hit when currency investors wish to hide in the American dollar (USD) and other reserve currencies like the EUR. On top of that, the Brent oil price plummeted. Small currencies have less liquidity and in market crisis with falling investor risk appetite, they fall fast with increasing spreads. It is also worth noticing that the correlation between the NOKEUR and the Brent is high when the Brent is falling hard, but not fully the opposite, strange. This article looks into this correlation phenomenon.

The NOK Corona crisis and the NOK in the 2008 crisis – Is it comparable?

Actually, during the 2008 crisis, the NOK and the Brent oil price both were hit very hard. However, they both performed very strongly after the crisis. This time around the NOK has been hit a second time most likely due to a new weakening of the Brent oil price. The Corona crisis is a different crisis and historic events is not an indicator for future performance.

FIGURE 1 – Comparing the behaviour of the EURNOK in the 2008 and the Corona crisis

Source: Bloomberg per 18/5/2020. Weekly data since pre crisis levels. Historic performance is not an indicator of future performance.

Looking forward – Where is the NOK heading?

It is hard to predict the future as always. Nevertheless, in a post Corona situation where all economists expect the global growth to accelerate again, I would expect the Brent Oil price to increase again too. This also goes for the risk premium that investors now apply to smaller currencies like the NOK; I would expect it to come down. If you reason like this, there seem to be potential in the NOK to the EUR.

Related insights

Norway - a sustainable oil and gas producer, does that really exist and what is the future?
Second interview with our Nordic Fixed Income managers – Corona (Covid19) crisis impacts
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