Norway’s krone: the new safe haven currency?

I've not sounded this out with our in-house Scandinavian, but an interesting article from the FT

The Swiss National Bank’s decision to intervene to weaken the franc has left currency investors with one less haven from the financial crisis.

Its move comes at a time when there are also questions surrounding the future haven status of two other leading currencies: the dollar and the yen.

While the dollar has enjoyed a liquidity premium amid the current financial turmoil, many investors expect it to lose its allure as the full impact of large-scale US fiscal and monetary loosening filters through.

Simon Derrick at Bank of New York Mellon says: “The dollar has clearly been supported by haven flows during the current crisis.

“But, in the longer-term, the sheer scale of US fiscal spending and the lack of international capital available to support it represents a direct threat to the dollar’s strength.”

The Swiss franc has been driven lower by the SNB, which last week intervened to sell the currency, saying its recent appreciation represented an unwelcome tightening in monetary conditions.

Meanwhile, the yen has been undermined by a series of data showing a steep downturn in Japan’s export-driven economy.

This has helped stoke expectations that the Bank of Japan will follow the SNB and intervene to weaken its currency.

So where do currency investors turn now? One answer could be Norway.

David Bloom at HSBC says “The ultimate haven currency in our view is the Norwegian krone. “It’s probably the best currency in the world.”

“It’s probably the best currency in the world”

This might seem surprising. Only last December the krone dropped to a record low against the euro, as falling oil prices took their toll on the currency. But, as crude prices have stabilised, the oil producer’s currency has fought back strongly.

Indeed, the krone is one of the few currencies that has outperformed the dollar so far this year, rising more than 3 per cent to NKr6.694. It has soared 11 per cent to NKr10.925 against the euro.

Mr Bloom says: “The Norwegian krone is our preferred major currency and we expect a sustained appreciation over the next 18 months.”

Analysts say on a number of measures, the krone is near or at the top of the league among the world’s 10 most traded currencies.

Norway’s economy grew 1.3 per cent in the fourth quarter of last year and is not forecast to experience as big a downturn as most other leading economies this year.

Monetary policy is also supportive of the krone, with the Norges Bank, Norway’s central bank, like those in other commodity-producing countries such as Australia and New Zealand, not expected to resort to quantitative monetary easing to boost inflation expectations. The country also has a large current account surplus.

The cost of insuring against sovereign default in Norway through credit default swaps is the lowest among the countries with the ten most traded currencies.

Mr Bloom says that if the stock of assets Norway has salted away from its oil revenues in the Government Pension Fund of Norway is added to the mix, the bullish story for the krone is complete.

But some analysts are less glowing about the krone’s prospects.

Gavin Friend at NAB Capital agrees the krone appears one of the best of a bad lot, with a healthy current account balance and interest rates likely to lend it support.

But he says: “You are trying to win the least ugly currency contest at the moment. I can’t disagree that it might move higher, but I can’t get too enthusiastic.”

His main concerns are the lack of liquidity in the market and the krone‘s long-held correlation with oil prices.

“I struggle to see how the Norwegian krone can outperform for a sustained period if oil prices remain low,” he says.

Ashraf Laidi at CMC Markets says the fact that the krone fell against both the dollar and the euro during the turbulence following the collapse of Lehman Brothers in September means it cannot really be called a haven currency.

But he believes that the krone, along with the Australian dollar, is ideally positioned for prolonged gains as risk appetite improves.

He says the Australian dollar represents an economy with a superior growth outlook. The country’s budget surplus is expected to hover at 1 per cent of gross domestic product – which compares with the deepening deficits of the US, Europe and Japan.

He says: “The krone has the upper hand as its structural situation is boosted by a hefty current account surplus standing at 5 per cent of GDP – the biggest in the industrialised world”.