Norway: Krone sinks to fresh all-time low in March and outlook appears bleak
March 27, 2020
On 20 March, after Norges Bank cut rates by an unprecedented 75 basis points, the krone ended the day at 12.57 per EUR, marking a record low. The depreciation was led by plunging oil and gas prices, souring global economic sentiment and, more recently, Norges Bank’s rate cut to buffer the domestic economy from Covid-19 and a worsening global economic outlook. The NOK gained back some ground on 24 March, likely due to an exaggerated sell-off and as Norges Bank announced measures to intervene in the foreign exchange market to take pressure off the krone. The Krone ended 27 March slightly stronger at 11.70 per EUR; nevertheless, the NOK was still down 11.7% over the prior month, 15.9% on a year-to-date basis and 17.1% over the same date last year.
The direction of the NOK is highly tied to oil and gas prices and, since the start of the year, both have taken a turn for the worse. The outlook for crude oil demand has plummeted due to the Covid-19 pandemic, while the inability of Russia and OPEC to reach an agreement on output cuts triggered an all-out production war. Therefore, a worsening demand outlook for energy products and significantly higher supply expectations have combined to cripple oil and gas prices. The natural gas market paints a similar picture, weaker demand from China due to Covid-19 weighing on economic activity has led analysts to predict a massive build-up in natural gas storage in Europe, and consequently prices have been depressed.
Moreover, Covid-19 has capsized global economic prospects, as highlighted by our latest Coronavirus in Focus report. The illiquid nature of the NOK makes it notably less attractive to investors in times of poor economic sentiment, putting further downward pressure on the krone. In addition, the recent monetary easing measures taken by Norges Bank, which consisted of two rates cuts within a span of a week brought the sight deposit rate down from 1.50% to 0.25%. The sight deposit rate now sits at an all-time low, while the Bank also noted they will stand ready to cut rates further to ensure ample liquidity. Consequently, the Krone hit a new all-time low against the euro following Norges Bank’s press release on 20 March.
Looking ahead, there is little evidence to suggest the NOK will strengthen against the euro anytime soon. On 1 April, OPEC+ producers will begin working without minding production quotas, a move that will likely spark an all-out production war between Russia and Saudi Arabia—and could potentially prove detrimental to prices. Moreover, any further deterioration in the global economy, and in turn crude oil consumption will drag on oil prices and the krone down with it. A potential divergence in domestic economic output between Norway and the Euro area in theory would provide a spark to the Norwegian krone; however, this would only aggravate global economic sentiment more and put further pressure on the NOK. Lastly, a larger-than-expected downturn in the domestic economy could prompt Norges Bank to bring rates down to zero before year end, which will also keep the NOK depressed this year and possibly into 2021.
Author: Steven Burke, Economist