A Hawkish Central Bank Gives Norway’s Krone a Chance at Comeback

Bookmark

Next year could be when the Norwegian krone turns from zero to hero.

Norges Bank’s hawkish turn may boost the currency after one of the year’s worst performances in the Group-of-10, HSBC Holdings Plc and Danske Bank A/S predict. The central bank has said interest rates may rise from the first half of 2022, in sharp contrast with the Federal Reserve and other authorities.

“Any sign of a more hawkish monetary policy divergence should be jumped upon by foreign-exchange markets looking for normalization and yield,” HSBC senior foreign-exchange strategist Dominic Bunning wrote in a note to clients.

Add to this hopes for a global economic recovery. The revival of the reflation trade as vaccines start to roll out, and a potential bounce back in the demand for oil -- a key Norwegian export -- could help a trade-weighted krone index escape a bearish trend that has been in place since early 2013.

A Hawkish Central Bank Gives Norway’s Krone a Chance at Comeback

Here are four charts that indicate the outlook for the krone in 2021.

Rates Support

The Norges Bank’s announcement means investors can add relative short-end rates spreads as a supportive factor, said Kristoffer Kjaer Lomholt, chief analyst at Danske Bank.

The currency will advance about 4% to 8.32 per dollar by the end of next year, according to the median forecast by analysts in a Bloomberg survey. That projected rise is higher than all of its G-10 peers.

Read More: Norges Bank Holds Rates, Adding Hawkish Twist

A Hawkish Central Bank Gives Norway’s Krone a Chance at Comeback

Economic Edge

Another edge for the krone is the fact that Norway’s economy hasn’t been hit as hard by restrictions to curb the coronavirus as other developed countries. Bloomberg survey estimates show Norway contracted 3.5% this year, less than many European peers, and it is expected to grow 3.4% in 2021 and 2.6% in 2022.

A Hawkish Central Bank Gives Norway’s Krone a Chance at Comeback

Oil Revival

Oil and gas make up almost 50% of Norway’s exports, so a recovery in crude prices will go a long way in boosting the krone. Despite declines this week, oil prices are expected to sustain their recovery from the rout earlier this year and stay relatively steady over 2021, analyst forecasts show. That would support the krone, especially if its correlation with Brent bounces from the lower end of this year’s range and back toward toward the high of 0.80 seen in March.

A Hawkish Central Bank Gives Norway’s Krone a Chance at Comeback

Too Bearish?

Options that payout should the currency weaken versus the dollar over the next year trade at a significantly wider premium than recent averages. That leaves space for repricing that could support the Norwegian currency. Danske Bank’s Lomholt recommends shorting the Canadian dollar versus the krone, and shorting the euro against the krone via options.

A Hawkish Central Bank Gives Norway’s Krone a Chance at Comeback

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.