Norway: Norwegian krone bolstered to over three-year high by strong oil prices
The Norwegian krone appreciated markedly against the euro in recent weeks, reaching its strongest level since October 2018. On 25 March, the currency traded at NOK 9.48 per EUR, which marked a 4.9% appreciation from the same day a month prior, while it was up 5.7% year-to-date. Moreover, the krone was up 7.6% in year-on-year terms.
The outbreak of war following Russia’s late February invasion of Ukraine has sent commodity prices spiraling, especially for gas and oil; Russia is one of the world’s top three crude producers. While it is not expected that Russia will cut off supply to Europe due to its importance as a source of income for the country, the imposition of sanctions and the uncertainty over war-induced supply constraints have weighed on expectations. Still, the European Union has already started to plan and source energy supply elsewhere, benefiting Norway’s external sector—the country is the second-largest oil and gas exporter in Europe—the country’s sovereign wealth fund, and the NOK in turn. Meanwhile, talks with Germany continue over a potential hydrogen pipeline connecting the two nations, while the gas pipeline linking the country and Poland could be ready by the end of the year, adding further impetus to the outlook for exports.
Additionally, an increasingly hawkish Norges Bank reinforced the NOK’s strength. At its latest meeting on 23 March, Norges Bank increased the sight deposit rate by 25 basis points, bringing it to 0.75%, and it penciled in seven further increases until the end of 2023.
Markets expect energy prices to remain elevated in the medium term, boding well for the NOK’s performance ahead. That said, the scope for further strengthening could be somewhat limited once the country reaches full production capacity. Going forward, the currency is seen depreciating somewhat from its current strong levels.