Trading the Norwegian Krone: Up or Down in 2023?
The Norwegian Krone (NOK) is not as popular as the euro or the British pound among traders. However, it is a currency related to one of the strongest European economies while some of the Norwegian Krone pairs with the single currency of the US dollar do not go unnoticed by traders.
This blog aims to inform beginner traders regarding the Norwegian krone, the Norwegian economy and share some analyst forecasts.
The Norwegian Krone and Norges Bank
The Norwegian krone replaced the speciedaler in 1875. At the end of 1992, Norges Bank, the central bank of Norway, decided to abandon the fixed exchange rate system in favour of floating exchange rates as the Norwegian currency was getting attacked by speculators.
Norges Bank was established in 1816 and is one of the oldest central banks in Europe. The central bank of Norway's main aim is to promote financial stability while it also manages the Government Pension Fund where the surplus wealth produced by Norwegian oil income is deposited. The policy rate is Norges Bank's main instrument for stabilising inflation and developments in the Norwegian economy.
Norwegian Krone Against the Euro
The Norwegian krone is the 14th most traded currency globally according to the Bank for International Settlements. The most popular pairs are the euro against the Norwegian krone and the US dollar against the Norwegian currency.
Date Range: April 1st 2018 – 27th June 2023. Date Captured: June 27th 2023. Past Performance is not an indicator of future results.
The monthly chart shows that the Norwegian krone strengthened against the single currency between December 2021 and February 2022, marking a two-year high at the start of the second month of 2022.
Date Range: April 23rd 2023 – 27th June 2023. Date Captured: June 27th 2023. Past Performance is not an indicator of future results.
However, since then, the krone has been losing ground against the euro, trading at 11.85 kr (June 27th) and becoming the worst-performing G10 currency this year.
Norges Bank Raises Rates to 15-Year High
On June 22nd the central bank of Norway raised interest rates to the highest level recorded in the last 15 years, surpassing analysts’ expectations, as it tries to combat inflationary pressures. Norges Bank governing board suggested that a new rate hike in August could be an option.
Norges Bank governor Ida Wolden Bache noted that “if we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched.”
When will Norges Bank stop raising rates?
Commenting on Norway’s central bank decision, Nordea economists said that “today’s hawkish decision shows that Norges Bank means business and is concerned about inflation becoming entrenched. The decision is justified given that inflation has come in markedly higher than anticipated. A weaker NOK and higher wage growth than expected worsen the inflation outlook further ahead. The weak NOK also contributes to sustaining the pressure on the Norwegian economy.”
Market analysts at TD Securities noted in a report that “Norges Bank accelerated its rate hike pace by delivering a 50bps hike to 3.75% at today's meeting. Adding to the hawkish hike, the Bank significantly upgraded its macro and rate projections. Today's (June 22nd) decision is a strong statement from Norges Bank, with the Bank clearly showing that it is ready to do whatever is necessary to bring inflation back to target.” In their report, they suggest that they expect two more 25 bps hikes in August and September, to reach a terminal rate of 4.25%, stressing that “while we see risks as roughly balanced, uncertainty is high.”
A report by Danske Bank that the euro could strengthen against the Norwegian krone in the coming months. “In the near-term NOK will be very sensitive to news on the global investment environment and the combination of weaker global sequential growth and tighter global liquidity conditions is rarely a good cocktail for NOK. We expect NB to sharply revise lower their fiscal NOK FX sales in August but before then the fiscal FX transaction mismatch leaves NOK vulnerable. We thus maintain an upward sloping profile for EUR/NOK in the coming months before we pencil in a move lower on both EUR strength fading and the NOK making a 2023-comeback,” they write in their report.
ING’s analysts stress that the Norges Bank has turned “hawkish” in its effort to support the krone, indicating that more tightening moves could be on the way. In their report published on June 22nd, the Dutch bank’s economists note: “Not only has the central bank gone further than that at this meeting, but it is now signalling a peak rate of 4.25% later this year – some 60bp higher than previously anticipated. By historical standards, that's a pretty big revision. NOK was as much as 5.5% weaker at the end of May on a trade-weighted basis, relative to what the central bank had been assuming back in March, though that difference has narrowed over recent days. That weakness also requires higher rates, according to the bank's model.”
Trading the Norwegian Krone and risk management
The Norwegian Krone is one of the less popular currencies in the old continent. It might not be as important as the euro in the global financial market or be a beacon of stability as the Swiss franc, but it is the currency related to one of the strongest economies in Europe.
Trading currency pairs involves risks, especially for beginner traders. Just because the Euro to Norwegian Krone or the US dollar to the Norwegian Krone pairs don’t belong to the major currency pairs doesn’t mean that there is less risk. Beginner traders should carefully study the forex market, plan their moves ahead and proceed with caution when executing their strategies.
A careful trading plan can help a beginner trader get closer to achieving his financial goals, but using risk management tools is essential for traders who want to build a comprehensive strategy. For example, risk management tools such as stop-loss orders can help beginner traders protect their funds from unexpected downturns or wrong decisions. Learning how to use them is a question of how much you would like to study as sources of educational content are many such as webinars, e-books, detailed how-to blogs and seminars. Experienced traders urge beginners to safeguard their strategies by using risk management tools so why don’t you follow their advice?
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
