Norwegian Krone’s Sizzling Rally Is Showing Signs of Stalling

(Bloomberg) -- After a blistering rally of 34% from this year’s record low against the dollar, Norway’s krone may be running low on steam.

The Scandinavian currency completed a second weekly loss versus both the greenback and euro on Friday, in step with declines in the price of oil -- Norway’s top export. Furthermore, krone gains in recent months were fueled in part by central bank purchases, which may be scaled back in the near future -- reducing support for the currency, according to DNB ASA’s Magne Ostnor.

“The purchases have proven a strong tailwind for the krone -- that will abate, reducing the momentum of krone appreciation,” said Ostnor, a strategist at DNB. He sees the Norwegian currency struggling to appreciate beyond 10.20 per euro, a level it hasn’t reached since March, and failing to regain the strength it saw in 2018 and 2019.

The Norges Bank has been buying the krone in record sums in recent months, offsetting a drop in demand from Norwegian oil companies due to regulation changes. The central bank is likely to scale down such purchases as the economy gradually recovers from the impact of the coronavirus pandemic, according to Ostnor.

To be sure, potential reductions in the purchases are still likely to leave them near two billion kroner ($221 million) a day, which is “well above the level that historically has had an impact on the krone,” said Erica Blomgren Dalsø, a strategist at SEB AB.

An uncertain outlook for oil prices and expectations of a volatile close to the year could also prove a drag on the risk-sensitive currency. Crude prices have wobbled in recent days, with Brent dropping below the $40 marker for the first time since June as fears of a resurgence in Covid-19 dim the outlook for the commodity’s long-term recovery. Shaky risk appetite has also weighed on the krone, as the stock market corrected from its record highs.

The krone slid 1.2% last week against the dollar to around 9.04 on Friday, while weakening by a similar amount versus the euro to around 10.70. The currency hit an all-time low of 12.1333 against the greenback in March.

©2020 Bloomberg L.P.