Norway’s krone will gain further as investors “desperate” for protection against a deepening European debt crisis turn to one of the few haven markets that isn’t overvalued, said Deutsche Bank AG, the world’s biggest currency trader.
The krone rose more than any other major currency against the franc on Sept. 6, when the Swiss National Bank said it will defend a target of 1.2 against the euro with “utmost determination.” As Swiss efforts to shut the door on franc appreciation force investors to turn elsewhere, the krone will be one of the currencies to fill the vacuum, said Henrik Gullberg, a London-based strategist at Deutsche Bank.
“There is a desperate need for safe havens and the krone is an obvious candidate,” Gullberg said in a phone interview yesterday. “The krone is not significantly overvalued, which is another thing that is attractive.”
The currency has lured investors drawn to Norway’s 10.5 percent budget surplus of gross domestic product last year, the biggest of all AAA rated sovereigns. Norway boasts Europe’s lowest unemployment rate and has been shielded from the worst of the global economic crisis thanks to its oil output. Income from the energy industry is stored in the country’s $540 billion oil fund, helping support the world’s lowest risk of default, as measured by credit default swaps.
The central bank today warned it would act to limit the currency’s strength.
“A krone that is too strong can over time result in inflation that is too low and growth that is too weak,” Governor Oeystein Olsen said today in a speech at the University of Oslo. “In that case, monetary policy measures will be taken. In Norway, the key policy rate is the relevant instrument.”
The krone is the best performing major currency against the dollar, the euro and the yen since Standard & Poor’s Aug. 5 downgrade of the U.S. deepened a global market sell-off. The krone rose as much as 2.3 percent to the euro after the Swiss National Bank announced its cap this week, and surged 10.2 percent against the franc. It gained 1.1 percent versus the euro yesterday before trading down about 0.3 percent at 7.5927.
The krone strengthened 0.2 percent to 7.5746 per euro as of 11:25 a.m. It was little changed against the dollar at 5.3839.
Norwegian government bonds rose yesterday, driving 10-year debt higher for the fifth straight day, as investors sought the relative safety of top-rated government debt. Two-year yields fell to a record low, with 10-year yields less than three basis points from an all-time low.
While Norway’s central bank and government have signaled they will adapt policy to avoid stoking krone gains that hamper exports, they have steered clear of any measures reminiscent of the interventions that the Swiss and Japanese have deployed. Policy makers have less reason to interfere with the Norwegian krone, as the currency hasn’t appreciated far beyond its fair value, Gullberg said.
Prepared for Fluctuations
“We have to be prepared for fluctuations in the krone exchange rate” amid “volatile” financial markets, Finance Minister Sigbjoern Johnsen said in an e-mailed reply to questions yesterday, after the krone reached its highest level against the euro since February 2003.
“There is less caution in terms of buying the krone over the longer-term horizon because valuation is not really a danger,” Gullberg said. “If you look at the Aussie dollar for example, it’s massively overvalued while this is obviously not the case for the krone.”
According to Copenhagen-based Danske Bank A/S, “the obvious safe-haven choice” among the Scandinavian currencies “is the Norwegian krone and a move well below 7.50 is certainly likely in EUR/NOK this month,” Senior Analysts Kasper Kirkegaard and Christin Kyrme Tuxen wrote in a note yesterday.
“We doubt Norges Bank will do anything active to mitigate the flows for now, other than verbally trying to intervene in the market,” the two wrote. “Actual intervention has not been used since 1999 and if push comes to shove, policy rates will be lowered as the first option.”
The Oslo-based central bank on Aug. 10 abandoned a planned increase in interest rates and left its benchmark at 2.25 percent, citing a “flare-up” in global market turmoil and weaker recovery outlook.
Still, Norway’s economy is growing “at a robust pace,” the bank said last month, suggesting “that the key policy rate should be raised further.”
Norway’s mainland economy, which excludes oil and shipping output, will expand 3 percent this year and 3.75 percent next year, the central bank forecast in June.
“The market is looking for a few currencies which are backed up by strong fundamentals, state finances which are reasonably credible and ideally also an external surplus and that obviously is true for the krone,” Gullberg said.
There are some potential drawbacks. Norway’s currency market is less liquid than other havens, depriving it of a “fully-fledged safe haven” status, Gullberg said. “It’s a small, illiquid currency and safe havens typically are much more liquid.”
Trading in Norway’s krone accounted for 0.7 percent of global currency market turnover in 2010, compared with 3.2 percent for the Swiss franc, according to Danske Bank.
A lack of liquidity will prevent the krone from becoming a true haven, according to Elsa Lignos, a London-based senior currency strategist at RBC Capital Markets in London.
In terms of liquidity, the krone “is almost like an emerging-market currency,” Lignos said in a phone interview. “When you think about what role a safe haven serves, the idea that you could pile huge flows into a currency where liquidity is limited is challenging,” she said.
Still, according to Danske Bank’s Kirkegaard and Tuxen, some investors and analysts “might underestimate the kind of amounts we could potentially see flowing into the krone if the European debt crisis evolves further.”
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