Norway Warns It May Intervene to Stop Historic Krone Slump

(Bloomberg) --

Norway’s central bank said it’s ready to intervene in currency markets for the first time in more than two decades, after the krone became the victim of the worst sell-off in its history.

“In recent days, there has been an extraordinary situation in the market for Norwegian kroner and movements in the exchange rate have been historically large,” the central bank said on Thursday. “Against this background Norges Bank is continuously considering whether there is a need to intervene in the market by purchasing Norwegian kroner.”

With a slump in the price of oil pummeling western Europe’s biggest crude exporter, and liquidity getting sucked out of small markets, Norway’s currency appeared to have no buyers.

The krone sank as much as 7% against the euro, after slumping up to 12% in the previous session. Against the dollar, it plunged 7.5%, following declines as deep as 14% on Wednesday.

The fury of the sell-off is unprecedented, according to currency strategists. And the statement by Norges Bank appeared to do little to reassure the market. The krone was still down more than 3% against the euro and 4% versus the dollar after its announcement.

“The moves in markets are unleashing the whole tool kit of central banks and this is potentially the next round of measures high Beta/oil exporters may consider,” said Jordan Rochester, a strategist at Nomura.

The announcement by Norges Bank may take some steam out of the “relentless” decline in the krone, “but history shows that FX interventions can only slow, not stop, fundamental moves,” he said. Rochester also noted that Norway’s current stack of currency reserves is smaller than the daily trading turnover. “Good luck, Norges,” he wrote. It’s why the market did little more than “shrug.”

Not since the 1990s has Norway specifically used its monetary policy to steer the exchange rate. Back then, the central bank was ultimately forced to abandon the strategy after the Asian crisis of the late 1990s proved too intense to fight. The last time Norges Bank conducted an outright currency intervention was in 1999, according to a written response by the bank to Bloomberg.

The Oil Trap

It’s “all about the oil collapse,” said Kristoffer Kjaer Lomholt, a senior analyst at Danske Bank in Copenhagen. What we’re witnessing now is a “potentially evil fire-sale loop related to the funding of foreign assets.”

Norwegian policy makers have been fighting a crisis on two fronts, as the fallout of the coronavirus brings the domestic economy to a standstill while the oil-price crash destroys its main export.

The central bank has responded to the meltdown by delivering an emergency half-point rate cut earlier this month and pumping extra liquidity into the economy. The government, which is backed by the world’s biggest sovereign wealth fund, has stepped up stimulus pledges and said it’s willing to do more.

Lomholt said he sees “a case building that more NOK weakness and volatility raises financial risks instead of cushioning the negative impact from COVID-19.”

The Norwegian currency’s future “is anyone’s guess now,” said Robin Winkler, a strategist at Deutsche Bank. “It’s a broken market.”

Valentin Marinov, strategist at Credit Agricole in London, wrote that “at the moment everyone is selling everything to get their hands on USD cash. The less liquid the asset, the greater the price impact of these flows.”

©2020 Bloomberg L.P.