Norway’s Central Bank May Intervene After Krone Suffers Worst Drop
Sat, April 10, 2021

Norway’s Central Bank May Intervene After Krone Suffers Worst Drop

It has been in 1971 since Norwegian krone is at this lowest. / Photo by: Janusz Pie?kowski via 123rf

 

For the first time in more than two decades, Norway’s central bank announced that it is prepared to intervene in the currency market after the krone suffered the worst sell-off in history, Bloomberg reports.

Norway’s Krone Suffers Worst Drop in Half a Century

The dollar was recently traded at 11.86 kroner and euro at 12.96 kroner. The current movements in the foreign exchange markets are overwhelming for Norwegians who are used to having a strong currency in its economy. In just a couple of days, the country’s krone is down for more than 20% to a dollar and the euro did not cost more. It has been in 1971 since Norwegian krone is at this lowest. One Danish krone now costs 1.73 Norwegian kroner and a Swedish krone costs 1.14.

The central bank said that movements in the foreign exchange rate have been “historically large” and considers it an “extraordinary situation” for the Norwegian kroner. This is why the Norges Bank or the central bank of Norway is considering whether they have to intervene in the currency market by buying Norwegian kroner. The daily added that there appear to be no buyers for the country’s currency as the price of oil hit the biggest oil producer in Western Europe.

After a 12% decline in the last session, the Norwegian krone sank 7% against the euro and 14% against the dollar. Currency strategists believe that the statement of the central bank will have little effect to reassure the market as the krone was still down 4% against the dollar and more than 3% versus the euro after its announcement that it may intervene in the currency market.

 

The central bank said that movements in the foreign exchange rate have been “historically large” and considers it an “extraordinary situation” for the Norwegian kroner. / Photo by: belchonock via 123rf

 

Comment From a Currency Strategist

Japanese financial holding company Nomura’s currency strategist Jordan Rochester opined that the announcement made by the central bank of Norway may be seen as caused by the decline in krone yet history shows that foreign exchange intervention cannot stop but only slow the fundamental moves. A foreign exchange intervention (FX intervention) is a monetary policy used by the central bank. It is when the central bank takes an active participatory role in influencing the monetary funds' transfer rate of the currency.

Rochester likewise notes that the present stack of currency reserves of Norway is smaller compared to its daily trading turnover. The last time Norway used its monetary policy to steer the nation’s exchange rate was in the 1900s.

Danish banking company Danske Bank’s senior analyst Kristoffer Kjaer Lomholt said it is about the oil collapse. There are currently two fronts of the crisis that the Norwegian policymakers are fighting as the coronavirus pandemic has also brought their economy to a standstill and the crash on oil price destroys its primary export. Norges Bank responded by providing an emergency half-point rate cut this month as well as pumping liquidity into the domestic economy. Although it is backed by the biggest sovereign wealth fund in the world, the government said it is ready to do more, such as stepping up the stimulus pledges.

The leading companies in the extraction of crude oil and natural gas industry in Norway as of March 2020, by the number of employees, are Equinor ASA (18,000), Aker Bp ASA (1,649), DNO Iraq AS (854), Wintershall Norge AS (459), Var Energi AS (417), Esso Norge AS (403), Lundin Norway AS (373), Spirit Energy (146), Dea Norge AS (99), Petoro AS (64), Idemitsu Petroleum Norge AS (60), and Ineos E&P Norge AS (48). This is based on the survey conducted by database company Statista. Other firms included in their list are Suncor Energy Norge AS, Capricorn Norge AS, Norwegian Energy Company ASA, and DNO Yemen AS.

Norwegian Krone: Historical Chart

1 EUR is equal to 10.40 NOK as of March 2. Changes from March 2 onwards are as follows: March 3 (NOK10.33), March 4 (10.30), March 5 (10.37), March 6 (10.49), March 9 (10.89), March 10 (10.84), March 11 (10.85), March 12 (11.36), March 13 (11.09), March 16 (11.47), March 17 (11.50), and March 18 (11.70). This data was provided by the European Central Bank.

Lomholt expects that more Norwegian krone volatility and weakness will increase the financial risks rather than cushion the negative economic impact of coronavirus. Another strategist from the Deutsche Bank, Robin Winkler, said, “It’s a broken market,” referring to Norway’s currency market.

Forbes has likewise recently reported that Norwegian authorities have now confirmed that a fine of 20,000 Norwegian kroner or a 15-day jail sentence will be handed out to people caught breaking the home isolation or quarantine rules. This includes people caught staying in the country cabin outside of their home municipality. A hefty fine will also be imposed on anyone organizing sports or cultural events.

There’s a reason behind the harsh penalty because summer houses are extremely common in Scandinavia but those in rural areas are often thinly spread and small. The small-town mayors have warned that if many people will decamp and fall ill, the virus will likely spread faster and local hospitals may be unable to deal with the volume of the sick patients. Thus, city-dwellers are better off staying home where healthcare and hospital beds are widely available.

According to real-time world statistics provider Worldometers, there are now 1,683 cases of coronavirus in Norway, 1 recovered, and 6 total deaths. There are other emergency measures that the country has implemented so far, such as banning foreign citizens who are not residents of Norway from entering their country. The Norwegian Institute of Public Health (FHI)’s recent guideline shows that anyone who returned from travel outside their country since February 27 will be home quarantined for 14 days after they return home. Those subjected to home quarantine must limit their contact with other people. Using public transport, visiting places where it is difficult to maintain the 1- to 2-meter distance from others, and going to work, are prohibited, but leaving their house for a walk is allowed.

Norway is one of the world’s most inclusive economies and is known for having the lowest income inequality in the world. The world is taking lessons from its policy-makers. Now that the country is hit by global economic woes, the outlook of foreign investors may change. In uncertain times as this, it may call for a restructuring of the Norwegian economy.