Norway: Norwegian krone plunges to record low against the euro
The Norwegian krone sank to an all-time low against the euro at the end of October as low liquidity and the weaker global growth outlook dragged on the currency—and despite a string of interest rate increases this year by Norges Bank. On 31 October, the krone ended the day at 10.25 per EUR, a 3.4% depreciation from a month earlier. Moreover, the krone was 3.5% weaker year-to-date and was down 7.4% from the same day last year.
The recent depreciation, which lead Norges Bank to downgrade their projection for the long-term exchange rate equilibrium, can be partly attributed to the krone’s low-liquidity nature; in short, as global economic uncertainty mounts, investors and traders tend to avoid exchange-rate volatility in small, open economies with less liquid currencies irrespective of domestic economic conditions. In addition, Norway is a trade-dependent economy, where petroleum products represent more than half of exports and its currency is consequently correlated with commodity prices. Over the past year, a subdued global growth outlook has hampered oil demand estimates, weighing on international oil prices as a result. Norway’s merchandise trade surplus has thus weakened considerably, which has added further downward pressure on the krone.
In early November, however, higher than expected industrial production data, a recovery in oil prices and positive talks around the U.S.-China “phase-one deal” boosted the krone somewhat. Moreover, solid Norwegian trade data for October in mid-November likely provided further relief.
Looking ahead, economic growth is set to accelerate in 2019 and is projected to gain further steam next year. Meanwhile, inflationary pressures have remained slightly below the Norges Bank’s 2.0% target rate and are projected to remain in and around the target rate over the next couple of years. Both of these factors should support the krone going forward.